Readers Question: What are the advantages and disadvantages of leaving pension provision to the private sector? Could you please explain with the help of economic theory?
Advantages of Leaving Pensions to the Private Sector
- Private Sector is thought to be more efficient. The private sector has profit motives to gain the best return for investors, otherwise, people will look elsewhere. This means in theory, private pension firms will take good care of the investments.
- Governments don’t invest pension contributions. In theory, people pay taxes to make pension contributions, but, the government rarely invest this money. Instead, they pay pension payments out of current expenditure. This means with an ageing population, they will struggle to pay the pension commitments.
- Avoid Higher Taxes. Private pensions enable the government to lower taxes. Arguably lower income tax may increase incentives to work. Lower corporation tax may increase incentives for business investment in the UK.
- Ageing Population. A real problem the government faces is that the % of people over 65 is going to increase. This means an increase in the dependency ratio. Basically, there will be more people receiving pension compared to the number of people working and paying income tax. This is going to leave a black hole in government finances, relying on private pensions would avoid this problem.
Problems of Private Pensions
- It will take time to change. The government has made a commitment to people in work they will receive a state pension. The government can’t turn round and tell people nearing retirement age that they are not going to honour these commitments. They could say to young people that they have to get a private pension, but, this means the government will still be paying state pensions for 20,30 or 40 years.