The need for capital markets and proper advice
Why and how do we have pensions?
The provision of income in old age is one of the most precarious of all social benefits. At a macro level, how do we prevent our elders from falling into poverty once they are no longer working? At a micro level, how do we ensure that the income decline in retirement is not too steep, thereby maintaining living standards? Many books have been written on the question of why we have pensions in the first place – notably by professor Nicholas Barr of the London School of Economics, who identifies three goals for retirement: consumption smoothing, insurance against longevity, and poverty prevention.
Each of these points raise the question of “why”. We arrange for pension systems to smooth the consumption of what we earn now, across to what we will need later. We then need to ensure that we have enough savings to reach what we might euphemistically call the “end of retirement”. Lastly, and this is a macro-goal, we need to redistribute a portion of our wealth to ensure that workers who did not earn enough over their lifetime do not fall into poverty in retirement.
The “why” is relatively straightforward and not overly controversial. The question of “how” is another matter.
A German example
Recently, Germany announced plans to establish a new super fund to support its retirement system. Although the country has one of the oldest ‘modern’ retirement systems in Europe...
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