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May 23, 2010


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Paul M. Secunda


Very interesting post. The problem is different in different countries when it comes to pensions. Some countries, like the US's Social Security system, have primarily a pay-as-you-go (PAYG) system where current generations support the pension payments of previous generations. This system is also a big problem in Japan, for instance, with its aging population. The US and others have tried to somewhat overcome the shortcomings of the PAYG system (read: population decline) by also promoting company-based pensions (defined contribution plans, 401K plans, etc.) with decidedly mixed results.

Many other countries, including much of Europe, have general or capital funds system where pension benefits are paid directly out of the government fisc. Of course, when government loses money in the short-term because of an economic recession, it impacts not only current jobholders but also the interest rate assumptions that older workers' pensions are built upon. Capital requirements should lessen the danger of pension cuts like the ones you describe above, but not even the most dire assumptions took into account the Great Recession of 2007-?. So countries who have this model are also in for rough sledding for some time.

The best bet, I believe, is some combination of a traditional pension plan based on the capital funds model, with some mechanism for both annuities and define contribution plans (e.g., 401K plans). The United States and Europe currently have an underdeveloped annuity market. Yet only such a diverse approach to global pension finance trends can really keep this type of situation from repeating itself.

If people are interested in this area of law, there is an emerging field here called Global Employee Benefits Law. Check out the Global Pension website or my recent co-authored book with Estreicher and Connor, Global Issues in Employee Benefits Law (West 2009).


Kim Krawiec

Thanks for this detailed information, Paul -- very helpful. The extent to which various countries are able to successfully implement austerity measures will be interesting -- if painful -- to watch. I continue to think that some countries won't be able to simply "austere" themselves out of this crisis, in the absence of improbable economic growth or (probable) debt restructurings, regardless of current EU rhetoric. But we'll see.

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