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<\/figure>\n\n\n\nThe\nresearch on the issues related to the demographic transition in developed\ncountries started when they started facing the transition. Learning from their\nexperience developing countries should also start putting efforts to tackle the\nissues related to demographic transition before the ticking bomb explodes. Currently,\nPakistan\u2019s youth bulge offers the potential of a demographic dividend. On the\nflip side, however, this bulge will eventually enter the unproductive ages,\nadding an economic burden on society if not managed properly. The issue then becomes of how to improve or at least\nmaintain the standard of living of the old age population through social\nsecurity schemes.<\/p>\n\n\n\n
Our government pension system taxes the current working population to pay for the pensions of the retirees. This system is the pay-as-you-go (PAYG) pension system. But as the demographic transition is going to take place, fewer workers will have to bear the burden of a larger old population due to the increasing old-age dependency ratio. We need to reassess this system. <\/p>\n\n\n\n
An alternative to the PAYG system is a fully funded pension system. Workers are taxed a particular amount from their income which is invested by the government on their behalf. The return from those investments are given to the same workers when they retire. Moreover, the pension system and formal social security system benefit workers employed in the formal sector mostly and specifically employed in the government sector. There is room for a reassessment of the social security and pension systems. <\/p>\n\n\n\n
If the PAYG system is not dispensed with, the demographic transition in the long run is going to result in a rising proportion of pensioners in the population. Workers in the future will be taxed more than today to provide the same standard of living to the dependent population. Clearly this system will become fiscally unsustainable. This fact advocates transition from the PAYG system to a fully funded pension system. Policymakers must start thinking of reforming the social security system. <\/p>\n\n\n\n
Though\nthe rising portion of pension payments in the budget is slowly becoming a cause\nfor concern, the current PAYG system is not raising alarm because of the current\nlow old-age dependency ratio. When a country has low old-age dependency ratio\nreserves build up as population making the contribution is more than the\npopulation receiving pension benefits. But after the demographic transition\nold-age dependency ratio increases, the PAYG pension system becomes fiscally\nunsustainable as there will be fewer workers who will bear the burden of the\nlarger aged population.<\/p>\n\n\n\n
In fully funded system pension, expenditures are borne by the individuals themselves when they were working. Just like in the PAYG system, a portion of salary is deducted for pension benefits. But rather than giving those contributions to the retired population, the returns are invested and pension benefits provided from the returns of that investment.<\/p>\n\n\n\n
The problem with the PAYG system is that the burden of pension expenditures lies on the working population. We will need higher taxes to meet expenditures as the old-age dependency ratio rises. <\/p>\n\n\n\n
This creates inefficiencies in the labor market. People revise their decisions regarding labor force participation, degree of effort, and retirement plan among other things. The contribution is a saving rather than a tax in a fully funded pension system. Thus the government will not have fiscal responsibility. <\/p>\n\n\n\n
There is also the question of the quality of life of the poor and\nelderly in the present system which covers only government employees plus a\nvery minor proportion of private employees in the formal sector whereas the informal\nsector remains out of reach. The\ninformal sector workers have to rely on other systems including civil society\norganizations such as mosques, NGOs, and private philanthropists. Such sources\nare uncertain. <\/p>\n\n\n\n
However,\nthe transition from the PAYG system to a fully funded pension system involves\ncost because the government will have to bear pension expenditures of already\nretired workers, to whom the government had made generous promises when they\nwere working. But the cost of transition is rising with time because the proportion\nof the retired population is increasing with time. So, this cost must be\nconsidered as temporary.<\/p>\n\n\n\n
There is not all gloom and doom, though. There are ways to improve the situation. One is to increase female labor force participation. Adoption of technology and innovation can lead to an increase in the productivity of the employed labor force. A positive impact on the overall labor force will increase our output. Special attention to these factors will also help weaken the negative impacts of the demographic transition on output. By making enough savings and investments during working age, the issue of financing the elderly will be taken care of. Based on those savings, there is now talk of even a \u201csecond demographic dividend\u201d. The first demographic dividend, for that matter, is based on the income generated by the working ages. <\/p>\n\n\n\n
To quantify the costs of demographic transition and a possible move from the PAYG system to a fully funded one, a detailed study is needed that explores the transition from the PAYG system to a fully funded pension system. We also need to explore the costs associated with transition. We must also investigate other fiscal responsibilities affected by demographic transition. These include health expenditures and social security schemes for the elderly population other than pension schemes. <\/p>\n","protected":false},"excerpt":{"rendered":"
By Mr. Omer Siddique The fiscal impact of government employees\u2019 pension is fast becoming a ticking time bomb. The demographic transition \u2013 the aging of the population due to declining fertility and increasing life-expectancy \u2013 is not going to help in the long run. According to a thesis completed at PIDE, it is estimated that […]<\/p>\n","protected":false},"author":2,"featured_media":520,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1,7],"tags":[143,144,15,142,141,145],"yoast_head":"\n