Pension systems based on rising revenues made possible by demographic growth (demographic dividend) are unsustainable. These systems were devised at a time when each new working generation was more numerous than the previous, which enabled easy and cheap financing of pension and other government expenditures out of rolled-over debt. This was a brief window, however; as the dividend disappears, society needs to adjust, particularly its pension systems.
These demographic changes, which play a crucial role in the life of societies, are generally perceived with a lag. Policies—even if well designed and generously financed—cannot substantially alter demographic trends. Rather, institutions need to adapt to demographic developments. If pension systems are not adjusted to population developments, huge social and economic problems will arise, including increasing intergenerational conflict.
There have been many studies dealing with pension issues, but there are no clear prescriptions on how to solve the problem of inflated pension expectations. This article addresses some of the issues that make redesigning pension systems difficult. Chief among them are public perceptions about the role and financing of public pension systems.