A Government Pension Plans should be abolished

Barr (2001) and Turner (2006) state that aging populations in some industries or some countries
become main subject debate which is should use an unfunded pension plans or a funded pension
plans. Furthermore, another controversy is related to the government involvement in the pension
plans. The Organization for Economic Cooperation and Development (OECD) shows that the
pension funds have a huge amount and have significant role in economy. In 2013, the pension
funds asset only from G71 countries (exclude Japan) is about US$18.4 trillion. Furthermore, Barr
and Diamond; Bonasia and Napolitano; Impavido and Musalem; and BoGaert state that the
retirement system is essential for economics, for the government, and for aged peoples.
However, Barr (2006) argues that many countries, for instance Germany, Greek, Japan, United
States and United Kingdom face the pension funds problem because of population aging.
Therefore, the government, for instance Australia, Japan and the United States, will face the
elderly people who are living longer and will burden their budget. Besides that, the government
or public pension plans is contradict with the free market or the capitalist system which has
entrepreneurship and risk taking character. This paper will examine the drawbacks of the
government involvement in pension plans that according to the governments budget side and the
free market, therefore the pension should be more self-funded. Moreover, this will be followed
by a solution to solve the problems.
Barr and Diamond (2006) divide the pension relating to (i) the way they are organized which
consist of the fully funded scheme and the pay-as-you-go (PAYG) scheme; and (ii) the relation
between contributions and benefits which is consist of the defined-contribution scheme, the
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G7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the
United States

defined-benefit scheme, and the notional defined-contribution scheme. Moreover, based on the
World Bank Policy Research Report, the pension scheme divided into: firstly, the PAYG Plans
which is mandated, managed, financed, and insured by the government; secondly, the
Occupational Plans which managed by employers, and lastly, the Personal Saving and Annuity
Plans which fully funded by the employee. In addition, Whitehouse (2007) divided the pension
fund into the Firs-Tier which has a redistribution purposes and the Second-Tier which has an
insurance purposes. Those purposes are want to secure the elderly people in terms of providing
social security or ensure the elderly people have a secure financial in the future.
Initially, the pension funds system has objective and benefits for the retiree and the government.
Barr and Diamond (2008) state that the primary objective of pensions is economic security in
old age, achieved through consumption smoothing, insurance, poverty relief, and redistribution
(p.25). Therefore, the pension funds are the tools for the government to provide retirement fund
for elderly and to redistribute an income. The government involvement is needed in the pension
plans to ensure that the pensions objectives and benefits are achieved. According to the World
Bank Policy Research Report, the governments intervention is needed because some people
could not save money for their old age, the government has a power to redistribute income and
could protect from a market failure risks.
Meanwhile, Thomas and Spataro (2014) argue that pension plans has many advantages, for
example employee will stay longer in the firm since they will accept pension funds when they
retired. Besides that, in the financial market, Bonasia and Napolitano (as cited in Thomas and
Spataro, 2014) argue that pension funds generate personal and national saving and increasing
corporate performance as a result will enhance the economic growth. Furthermore, Impavido and
Musalem (as cited in Thomas and Spataro, 2014) argue that pension funds have positive effect on
2

stock and money market development. Moreover, BoGaert (2012) argues that the financial crisis
is not caused by pension funds. Contrary, the pension funds is important for the financial
integrity since it could minimize risks of cost through creates a great funding.
However, the government involvement in pension plans is anathema of a free market. Nell
(1984) and Riesman (1996) argue that the governments main responsibility is only the provision
of defense, law and order, and provision particular public goods. The government does not
involve for ruling the price, wages, and working aspect. Furthermore, Becker (as cited in Nell,
1984) argues that the government programs which purpose to redistribute income are
unproductive. This role will discourage family ties, decrease labor force participation, and
encourage illegitimacy, do not improve the poor because they diminish their efforts to earn better
live. However, Meltzer (2012) argues that freedom of choice generates more satisfaction to more
people and only capitalism could provide growth and personal freedom. The government rules
may brings monopoly, raise barriers to entry, or incentivize socially desirable behavior.
Furthermore, Nell (1984) argues that the capitalism concern to human freedom in organizing
production and distribution which create entrepreneurs and innovators.
Comparing to the occupational pension plans and private pension plans, the government plans
have more drawbacks. Meltzer (2012) claims that no country has shown greater ability than the
United States to sustain growth and freedom over long periods. But the pressure on government
to redistribute income that prevails in all capitalist democracies has today produced massive
debt, bringing government spending to new peacetime highs (p.56). Furthermore, Holzman
(2000) argues that many countries which their government manages pension funds facing deficit
problems. This problem is generally covered by taxes and public debt. Therefore, high taxes and
increasing debt could harm the economic growth and the employment prospect. In addition,
3

related to a distributive concern, the government pensions often discriminate on the basis of
gender, for example the women workers usually have earlier retirement ages. In addition, the
World Bank Policy Research Report claims that a high payroll taxes distort labor markets and
reduce growth, for example, in Hungary, where facing the aging problem, the government
increases the tax, cutting the demand for employment, the supply of skilled labor, and national
output. The workers are poorly protected in their old age because the government pensions are
rarely fully indexed to inflation.
Another example is from the United Kingdom (UK), Barr (2006) argued that the UKs pension
scheme which used PAYG scheme and run by the state decrease the average earnings since the
state pension has been indexed to changes in prices rather than wages. Besides that, this scheme
also burden the government and has lost of its feasibility because of creates a pension funds
deficit which is presented trading lost and increase the government bonds. Furthermore, Nelissen
(1999) argues that in Netherland, the government also faces the aging people problem which is
the elderly proportion is higher rather than the working population. This problem will burden the
governments budget for the next several decades.
The cost of pension fund burden the government budget which is could give drawbacks for the
economic and the society. The Australian Bureau of Statistic (2014) states that Australia will face
the problem which is caused by elderly people growth in several next years. The Australias
population ageing is caused by sustained low fertility and growing life expectancy. Between
1994 and 2014, the proportion of people aged 65 years and over increased from 11.8% to 14.7%
and the proportion of people aged 85 years and over increased from 1.0% in 1994 to 1.9% in
2014 (the population of Australia at 30 June 2014 was 23,490,700 people). Related to the
government expense, in 2013-2014, the health and the educations function only cost 16% and
4

12% consecutively. This is lower rather than the social and security welfares function which cost
35%. According to the Report of the National Commission of Audit, in 2013-14, the government
of Australia should pay an estimated $39.5 billion for the Age Pension which has number 2.4
million peoples. This expenditure will increase at 7 per cent per year.
Furthermore, the Institute of Economic Affairs (IEA) (cited in Chan, 2014) claims that Britain
will faces increasing tax and cut their spending because of aging population. The IEA calculated
that in 2012, the government will increase the tax more than 17% of GDP or more than 300
billion. This regulation will burden their workers. In addition, Meltzer (2012) argues that many
governments campaign to ensure their public that the government will provide public services,
for instance employee pensions, to be paid in the future that do not burden the budgets. However,
a cities and states in the United States face the significantly increased of unfunded pension
liability. According to the State Budget Fiscal Year 2014 of State of Illinois, United States, this
state have to pay $6 billion for pension contributions (increase by $929 million), meanwhile the
revenue only increase by $817 million. Therefore, the State of Illinois has to reduce their
spending on higher education, economic development, and other aspects which the state
provides.
Moreover, the appropriate solution for solving the state pension problems is a state pension
reform. Holzman (2000) argues that the state pension reforms have been undertaken in many
countries, for example in Lithuania, Bulgaria, and the Republic of Korea which implement
modest PAYG scheme combined with funded scheme. In Hungary and Poland, the personal
pensions will be about two-third of the total pension package. Furthermore, Andrews (as cited in
Holzman, 2000) also argues that, in Kazakhstan, the government replaces the PAYG scheme with
the funded pension scheme. In addition, Barr and Diamond (2008) argues that the most
5

successful country in the pension reform is Chile. In Chile, the government gives more flexible
choices about the pension scheme to their workers. Kashiwase, Nozaki, and Tokuoka (2012)
argue that Japans public pension system reform will creates a positive impact on economic
growth by increasing labor force participation and would be relatively fair in sharing the burden
of fiscal adjustment between younger and older generations, maintaining fiscal sustainability
since could reduce the government annual subsidy by up to 1.25 percent of GDP by 2020 and for
generating productive workers. Furthermore, Nelissen (1999) argues that the Netherland
government plan to reform the pension scheme from the old-age state pension into combined
unfunded public old-age pension scheme and a capital funded occupational pension. Although
the redistributive impact will be decreased, the governments cost will be more efficient. In
addition, in the future, net savings will increase because of consumption leveling, generates
economic growth and, as a result the wages will be increase.
In conclusion, the government involvement in the pension scheme has purposes to protect the
elderly people and redistribute the income. However, the government pension plans generally
affects high taxes imposing and increase the public debt which will burden the governments
budget. In addition, the government pensions plans anathema the free market which could harm
the economic growth and the employment prospect. Therefore, the pension plans should be more
self-funded because it will creates the employment more competitive, productive, and
prosperous.

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