Pension costs are also escalating: firstly because of structural factors whose effect is to increase pension expenditure gradually and steadily; these factors are built into the pension schemes. Secondly, there are external factors, closely related to the state of the economy, which have the effect of either accelerating the pace of rising costs or curtailing the resources available to finance the programmes. The consolidated effect of the built-in factors would lead towards cost escalation even in times of economic growth, when rising costs could at least be faced with rising revenues; but with an economic recession and high unemployment this is hardly possible.
Moreover, further trouble builds up on a number of fronts. On the economic front, high rates of unemployment means immediate net losses of revenue (contribution income) for the pension scheme (it has been estimated, for instance, that every time unemployment rises by 1% in the USA the state pension scheme (OASDI) loses $2,000 million a year in revenue). On the income front, when the economy is unhealthy, the general propensity of most governments to cut public expenditure in order to reduce the budget deficit and fight inflation naturally reduces the chances of supplementing income from contributions with additional subsidies; in any event, competition for such subsidies becomes tougher because other areas of public welfare and social security may also be in need of additional resources (unemployment payments, supplementary benefits, and anti-poverty handouts).
On the expenditure front, the accelerated withdrawal of older workers from the labour market (induced or voluntary early retirement, disguised disability awards to redundant workers, etc) means that more pensions have to be paid sooner than was foreseen and for longer periods; in the same way, systematic lowering of pensionable age in order to ease the labour market situation drastically increases pension outlays.
There is also the effect of capital accumulation when vast numbers of employees are reduced to contingent or temporary work and part-time assignments, or let go altogether, so that employers can avoid paying out pension fund benefits. Pension funds, now worth over 7 trillion worldwide, keep much of the the capitalist system afloat. For more than 40 years, the pension funds of millions of workers have served as a forced savings pool that has financed capital investments. Workers' pension funds account for 74 percent of net individual savings in the USA and own more than one-third of all corporate stock and nearly 40 percent of all corporate bonds. Pension assets exceed the assets of commercial banks and make up nearly one third of the total financial assets of the US economy.
In Italy, for example, it has been projected that in the first third of the next century there will be two people drawing pensions for every one paying contributions from wages. In 1993 the number of workers (20 million) had already been exceeded by the number of pensioners (15 million), some of whom legally receive more than one pension (making a total of 21 million pensions). In Japan the elderly population will double within 25 years, according to the ILO. However, elderly people tend to continue working in Japan, with earnings peaking at age 55. Those who retire are often re-hired, albeit at a lower wage.
The problem is so acute in Germany that in 30 years there could be more pensioners than employees. One economist claims that Germans would have to work until the age of 70 to cover their pension costs unless there is radical pension reform. Otherwise, by 2030, workers will have to pay social contributions amounting to 36% of their salaries to cover care of the elderly.
The OECD estimates that by the year 2030, state pensions will absorb 13.5 percent of gross domestic product in France, 16.5 percent in Germany, 20.3 percent in Italy, 6.6 percent in the USA and 5.5 percent in Britain.
In the UK in 1994, with a cost of pensions to the taxpayer of £26.5 billion per year, it was estimated that this amount was rapidly becoming inadequate for those dependent on it. For although pensioner's incomes had increased by an average of 42% between 1979 and 1991, approximately one third of those retiring were expected to suffer dire poverty. This was due to: occupational and personal pensions only covering two workers in three, forcing many to rely on state pensions; basic pensions were no longer linked to increases in prices or earnings, resulting an erosion of the relative value of pensions over time (decreasing from 15% of earnings in 1994 to 6% in 2040); and state earnings-related pensions, introduced to assist poorer pensioners, had been substantially reduced in 1988. One London city council decided in 1993 to lower pensions for some former employees by 15%.