Reforms of Pension System and Problem of Aging Population

Abstract

This  paper  analyzes  the  far-reaching  changes  on  social  plane  caused  by  aging population  which  endanger  social  security  for  old  people,  especially  in times  of global economic crisis and major changes in the labor market. A special emphasis is given to the economic  unsustainability  of the pension system in Serbia, where the ratio of the aging population  and the working population  is very unfavorable,  and where high unemployment and weak economic growth threaten an aging population and increase the poverty. The analysis shows that pensions in Serbia in recent years have a real decline, and their relation to average earnings is still unfavorable despite large subsidies from the state budget which last years covers about 50 % of the expenditure for pensions.

The second part of the paper discusses the advantages and disadvantages  of PAYG (pay as you go) pension  system  and private  pension  insurance.  The advantage  of PAYG pension system is that it protects the retired persons' savings which would not be lost due to extraordinary market circumstances,  such as wars, high inflation, etc. This system avoids the risk of a failed investment  opportunities,  which is the biggest  weakness  of  private  pension  funds.  In addition,  the  population  trust  this system believing that the government  will not allow them to live in poverty when they get old. The key advantage  of the private pension  system  is that this system realizes the economic function of pensions, because contributions paid are saving for their  old age.  Also,  the  placement  of pension  contributions  to the capital  market increase the return on investment and total government savings, which contribute to higher economic growth. Advantages of one pension system are actually weaknesses of another.

Since the system "pay as you go" has proved ineffective to provide pension funding for the elderly population, which is increasing due to longer life expectancy, and its relationship  to  the  working  population  is  more  unfavorable,  it  is  necessary  to introduce   the   pension   reform,   which   has   already   more   or  less   successfully implemented in many countries of the world. Globalization and especially the global economic crisis have made this issue particularly urgent.

Finally, it is noted that the pension reform in Serbia should not just include leaving the system "pay as you go" and a gradual transition to a private pension plan. Also, it  is  necessary  to  implement   the  long  overdue  economic   reforms  to  achieve significant  long-term economic  growth, because only higher economic  growth can create the material conditions for desired changes in the pension system.