Pensions policy has become a hot political issue across the world. With the large increase in the proportion of pensioners in the population over the next fifty years, and the down turn in the equity market affecting private sector schemes, pensions systems in many countries are under severe pressure. Diagnoses abound and diverse solutions are put forward. Much of the analysis makes implicit assumptions about the economic behaviour of individuals, employers and financial markets, assumptions that may well not hold in practice. This report identifies four key areas that are central to the debate. It reviews the extensive academic literature in these areas, setting out what we know and what we do not know, and identifying where further research may help advance our knowledge. Many people see increased individual saving as central to any solution. But others are concerned that purchases of financial assets by the working population will simply create an asset price bubble that will explode when people seek to liquidate their holdings in retirement. The authors review the evidence on demography and its impact on the capital markets.
The increasing pensioner population will also stimulate demand for life annuities; the second chapter of the report investigates the functioning of the annuities market, and assesses the economic factors that limit its development. In many countries, employers play a key role in providing or facilitating pensions. To understand why their commitment has tended to diminish in recent years, and to predict the role they will play in future, the third chapter looks at the reasons employers have pension schemes, and the evidence of their impact on employee behaviour. Governments have made extensive use of tax incentives to increase pension saving. The final chapter examines the empirical evidence for their effectiveness, and also assesses whether means-tested support of the elderly discourages saving.