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What is the Pensions Crisis?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 28 August 2016
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The pensions crisis is an ongoing concern in a number of nations about the ability to fund pensions, especially those for public employees. Worries about pension funding began to arise in the early 2000s in response to a number of factors, including problems with pension funds, growing numbers of retirees, and fewer contributions into such funds. Some critics used the pensions crisis to fuel a discussion about radically retooling the system, while others felt the crisis was overstated.

Pension funds are stocked with monetary contributions from current workers. As people pay in, their funds support retired workers and are also used in investments to help the fund grow. Several factors can contribute to a pensions crisis. One is demographic shift. If there are large numbers of retirees, there may not be enough people paying into the fund to cover their needs, especially with growing life expectancies. Some reformers suggest adjusting the retirement age upwards to reflect changing lifespans and address the pensions crisis.

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Another issue can be poor management of a fund. If the fund manager makes poor investment decisions, the fund may shrink instead of growing, or fail to grow enough to meet the needs of retirees. In some cases, municipalities and other agencies borrow from their pension funds to cover immediate expenses, and never repay these funds. When people retire, expecting to draw on the pension fund, the reduced size of the fund makes it impossible to honor pension obligations. Changes in employment demographics can also be a factor; when the public sector undergoes cuts, fewer workers are making payments into public employee pension plans.

People intending to rely primarily on a pension in retirement can be hit hard by a pensions crisis. They may not have enough funds set aside to meet their needs and could have trouble remaining in their homes, paying for health care, and managing living expenses like food. Individuals already in retirement have few options for pursuing work to make up the difference, while older adults nearing retirement and concerned about their pensions may not be able to build up alternate retirement investments quickly enough.

A number of steps can be used address a pensions crisis, including borrowing money to replenish funds, increasing the retirement age, and developing alternative retirement investments. During the global economic crisis that began in 2008, the pensions crisis was an especially hot topic of debate, with many public employees protesting about depletion of their pension funds and lack of access to money in retirement. Many pension funds relied heavily on investments that failed, leading to accusations of mismanagement.

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