Many countries have generous pension plans in place but that hasn’t stopped the World Economic Forum from referring to pension plans as a “global time bomb.” As Nobel economist Richard Thaler points out, the problems of retirement, mainly saving for it, are a very recent phenomenon.
“It’s really a 20th century problem,” he says. “People started living longer and families started dispersing. The old pensions were you work a certain number of years and then you get paid a pension, an amount of money each month for the rest of your life. That was really easy.”
According to Thaler, companies no longer wanted to offer those kinds of pensions, and today the burden is placed on employees to figure out how much to save and how and where to invest the money. But living longer and healthier lives should surely be something positive, not dread-inducing. So the question becomes, should the responsibility lay with the individual or with governments when it comes to planning and saving for your pension?
“It’s up to us to make sure we have enough,” says Thaler. “And this is a big problem especially for people that are not making a lot of money. There is a shockingly large number of people in the United States, one of the richest countries in the world, that can’t get their hands on a thousand dollars if they have an emergency. And so what are they going to do with retirement?”
Fellow Nobel economist Peter Diamond believes that the burden shouldn’t be placed on the individual alone.
“A pension system that’s addressing all of the issues will be worrying about poverty and risks that workers and families are subject to,” says Diamond. “It will be working at what’s called consumption smoothing, the idea that your standard of living shouldn’t fall too far after you've retired.”
While most developed countries have a universal pension system, Diamond says they aren’t complete because of a lack of diversity.
“By universal, it means the same rules for everybody, but we never have that because you always have a choice when to retire,” he says. “Different people with different kinds of jobs are going to retire at different ages because the jobs are different, people’s health are different, their opportunities are different. The issue is how much complexity you build into your universal system and how much you leave for dealing with the diversity elements.” To define the long-term priorities that allow for a solid, yet flexible approach to retirement is something we all want, but how do we do it in reality?
In Diamond’s writings on pensions, he identifies three separate parts of the system. The first being mandatory elements financed by work and employers, the second financed by the government and the third being voluntary contributions. While all three are important to the overall system, voluntary contributions become crucial in single national system setting.
“It’s appropriate that for a group where you would expect them to retire sooner, you would look for larger contributions and earlier eligibility,” he says. On the other hand, he understands the concern many people have of relying too heavily on the government.
“Will the government invest the money badly because of political connections? Will the government cease the money of the private firms? Private property as a right is only a right as far as the government recognizes it, and as we’ve seen in some of the financial crises, pension funds become a target for the government,” he says.
Diamond thinks that while people are right to ask these very valid questions, that they can and should feel comfortable relying on government pension plans, at least partially.
“It’s important that people have the opportunity to choose on their own if they want,” he says. “But it seems to me wrong to force people into a system, and so you need some mechanism that will work out a suitable pension system recognizing that some people want to make their own decisions, some want guidance."
“A critical dimension of this is having a good default, so that people are aware of the fact that they don’t have to make a choice. If they don’t, there will be something that’s been designed by the government that will handle it.”
After the work, research and modeling that both Diamond and Thaler have done surrounding pensions and their policies, it’s clear that a one size fits all approach does not exist and likely never will. Determining whether your governments’ pension plan will work for you remains a personal decision. In the meantime, the economists will continue doing what they do best, working to create clear, inclusive and effective policy recommendations.
“My mantra in designing policies is if you want to get people to do something, make it easy,” says Thaler.