The political risks of pension reform

Most countries social-insurance pension schemes are PAYG financed. In such institutional settings, politics play a tremendous role in guaranteeing the balance between pension revenues and expenditures. However, the anticipated revenues appear inadequate measured against the prospective benefits many pension schemes are expected to face - payment conditions may be indeed manipulated as a result. This generates a political risk for public, PAYG-defined benefits programs in particular. Systemic pension reforms attempting a switch from PAYG to capital funding and privatization face political risks as well; the same is true for the reformed pension schemes. Due to the general role of the state in most economies, such a political risk seems unavoidable, but may be mitigated.