Pensions: A System That Takes More Than It Gives

Pensions are often presented as a secure and necessary system to ensure financial stability in retirement. Governments and financial institutions claim that pension schemes protect individuals from poverty in old age, offering a structured way to save throughout their working life. However, in practice, pensions often resemble a forced savings system that extracts money from workers and employers under the guise of social security—without guaranteeing the promised benefits. Many workers contribute significant portions of their salaries over decades, yet they may not live long enough to collect the full benefits, and even if they do, inflation, mismanagement, and policy changes frequently diminish the value of their pensions (Barr, 2013; Kotlikoff, 2017).

How Pension Systems Function

The Basic Idea

The fundamental concept of pensions is simple: workers contribute a portion of their wages to a pension fund, which is then paid out to them upon retirement. Some pension systems operate on a pay-as-you-go model, where current workers’ contributions fund retirees’ pensions, while others are investment-based, relying on financial markets to grow the funds (OECD, 2021). However, these systems are not as stable as they seem. As birth rates decline and life expectancy increases, pay-as-you-go models become unsustainable, leading to frequent policy changes that further erode confidence in the system.

Government vs. Private Pensions

There are two main types of pensions: government-managed and private pension schemes. State pensions typically involve mandatory contributions and promise a fixed payout, while private pensions depend on investments and market performance. However, both systems share the risk of mismanagement, inflation, and policy shifts that can erode retirees’ expected payouts (World Bank, 2019). Private pensions, while often marketed as a more reliable alternative, still expose workers to market risks and corporate failures, leading to the possibility of underfunded retirements.

Why Pensions Are Not Always Beneficial

Workers May Never Reap the Benefits

One of the most glaring issues with pension systems is that many contributors never live long enough to enjoy their full benefits. The retirement age in many countries has been steadily increasing due to longer life expectancy, yet not everyone lives long enough to enjoy their pension (Turner, 2020). In some cases, people work their entire lives, paying into a pension system, only to pass away before receiving a significant portion—or any—of their benefits (Börsch-Supan, 2021). Meanwhile, the remaining funds do not always go to their heirs, further complicating the financial security of working families.

Pensions as Forced Wealth Redistribution

Pension schemes often function as a wealth redistribution mechanism rather than a true savings plan. In government-run systems, the money paid in by current workers is not necessarily saved for their future; instead, it funds current retirees. This means younger generations are often burdened with supporting older retirees, a structure that becomes increasingly unsustainable as populations age and birth rates decline (European Commission, 2020). The intergenerational transfer of wealth through pensions creates tensions and economic instability, as governments continuously adjust tax and benefit structures to maintain solvency.

Inflation and Economic Risks

Even when pensions are eventually paid out, their real value is frequently eroded by inflation. Governments and pension funds adjust payouts, but these adjustments rarely keep up with rising living costs. Over time, retirees may find that their pension provides significantly less purchasing power than expected, forcing them into financial insecurity despite decades of contributions (OECD, 2021). The result is that pensioners, instead of enjoying a secure retirement, often face rising costs of living with insufficient funds.

Private Pension Schemes Are Not Risk-Free

Many workers rely on private pensions, assuming they are safer than government-managed systems. However, private pension funds are subject to market fluctuations, recessions, and even outright mismanagement. Economic downturns can devastate pension investments, leaving retirees with less than they expected. Additionally, corporate pension funds have been known to collapse, taking workers’ savings with them (Diamond, 2011). In many cases, companies mismanage pension obligations, underfunding them while providing executives with extravagant benefits, exacerbating the unfairness of the system.

The Reality of Employer Contributions

Pensions Increase Labor Costs

Employers are required to contribute to pension schemes, significantly increasing labor costs. This mandatory financial burden reduces the funds available for wage increases and business investments. For small businesses, pension obligations can be a major constraint, discouraging job creation and economic growth (Kotlikoff, 2017). As businesses struggle with these costs, they often compensate by offering lower wages or reducing hiring, ultimately harming workers who are supposedly being “protected” by these pension programs.

A Disincentive to Work and Save

For employees, the idea that a portion of their salary is forcibly deducted can act as a disincentive to work harder or save independently. Many people would prefer to invest their own money in assets of their choosing rather than being forced into a system that may not provide adequate returns (Barr, 2013). Given the lack of control individuals have over their pension contributions, many workers view it as a form of hidden taxation rather than a genuine benefit.

Government Misuse of Pension Funds

Pension Funds Are Mismanaged and Redirected

Governments often use pension funds as a convenient financial pool for other expenditures. In some cases, pension contributions are diverted to unrelated government programs, such as funding wars, climate initiatives, or bailout packages for banks and corporations. This redirection of funds undermines the very purpose of pensions, leaving future retirees vulnerable (European Commission, 2020; World Bank, 2019). The lack of transparency in these financial decisions makes it nearly impossible for workers to hold their governments accountable.

Raising Retirement Ages to Delay Payouts

To compensate for failing pension schemes, governments frequently raise the retirement age, forcing people to work longer before they can claim their benefits. While this policy is often justified as a response to increasing life expectancy, it disproportionately affects lower-income workers who may not have the luxury of extending their careers due to physical or health limitations (Turner, 2020). This tactic effectively shifts the burden onto workers while allowing politicians to avoid necessary reforms.

Alternatives to Traditional Pension Systems

Lower Taxes and Private Savings

A more sustainable approach would be to allow workers to manage their own retirement funds by lowering taxes and encouraging private savings. Many people would be better off investing in diversified assets such as real estate, stocks, or individual retirement accounts rather than being forced into a rigid pension scheme (Kotlikoff, 2017). Giving individuals control over their savings fosters financial independence and adaptability.

Flexible Retirement Plans

Instead of a one-size-fits-all approach, pension systems could be restructured to offer flexible options, allowing individuals to access their savings earlier or invest in alternative retirement solutions tailored to their needs (Diamond, 2011). Encouraging financial literacy and self-reliance would empower workers rather than tying them to government-controlled schemes.

Conclusion

While pensions are marketed as a safeguard for old age, they often function as a wealth redistribution tool that burdens workers and employers alike. Many contributors will never see the full benefits of their lifelong contributions, while inflation, mismanagement, and political interference further erode the value of pension savings. A more flexible, individually managed approach to retirement planning—based on lower taxes and increased personal savings—may provide a more effective solution for ensuring financial security in retirement.

References:

• Barr, N. (2013). The Pension System: Myths and Realities. Oxford University Press.
• Börsch-Supan, A. (2021). Pension Reform in Aging Societies. MIT Press.
• Diamond, P. (2011). Reforming Pensions: Principles and Policy Choices. Princeton University Press.
• European Commission (2020). The Sustainability of Public Pension Systems in Europe.
• Kotlikoff, L. (2017). Get What’s Yours: The Secrets to Maxing Out Your Social Security. Simon & Schuster.
• OECD (2021). Pensions at a Glance: OECD and G20 Indicators.
• Turner, J. (2020). Longevity Risk and Retirement Income. Palgrave Macmillan.
• World Bank (2019). The Future of Pensions in an Aging World.