Although pensions do not directly produce any output to the nation, any government pays the pensions, maintains the pension funds, and encourages employees and business organizations to make previsions to the pension funds. Because pension funds significantly contribute to the economic growth of any country as follows.
1. Pension plans increase the employee performance
Employees in other words, labour are one of the economic resources among the four production resources which are utilized in the production function. Without the production resource of the “labour”, any business process cannot proceed. Also, the effectiveness and efficiency of the labour are very important for the performance of the business organizations which directly relate to the economic growth of a country. So, pension plans directly affect to increase the performance and satisfaction of the employees, to reduce employee turnover and absenteeism.
According to Lazear and Moore (1988), employees are discouraged to leave the business organizations before retirement, if they are paid full pensions when they work in the organization until retirement. This will reduce employee turnover. Also, Lazear and Moore said that employee turnover is twice of the employees who have no pension plans than the employees who have pension plans. According to Disney and Emmerson (2002), when employees are not provided the pension plans, they are more trend to change the business organization by 10 percent. (Thomas and Spataro, 2014). Higher employee mobility (change the jobs by the employees) represent higher employee dissatisfaction and lower employee performance.
Also, when people receive a pension when they come older, they can retire from their jobs. Since they have future income, they should not worry about their jobs. Then, young people can fill that job opportunities. (Kidd and Tran, n.d.). This also increases the performance of the businesses.
So, pension plans are very important to increase the performance of employees and business organizations.
2. Pension funds expand the capital markets
Capital market means the market where buyers and sellers gather for the transaction of the financial assets such as securities, stocks, bonds, and so on. Sustainable wellbeing of the capital market is necessary to economic development of a country.
When pensioners receive their funds such as employee provident fund (EPF) and employee trust fund (ETF), they invest money in the stock market to buy the shares of the companies, government securities such as treasury bills and treasury bonds, and so on. This will increase the expansion of the capital market.
As examples according to the results of a panel study using Generalized Least Squares (GLS) estimation done by Walker and Lefort (2002) using the 33 emerging markets, found that there is a positive and significant impact of pension plans on capital market development. Also, in the year 2010, Kim conducted a survey, using data from 16 OECD countries. Results of this survey also showed that there is a positive relationship between pension funds and capital market development. (Thomas and Spataro, 2014).
3. Pension funds stimulate the aggregate savings and generate interest income.
Contribution to pension funds mean the amount of the income that employees and businesses do not consume and invest at the currently and save for the future. As examples, we can say EPF and ETF funds. They are withdrawn from the current national income as savings and in the future people can consume or invest. In other words, pension funds can stimulate the level of national savings. (Blackbun, n.d.). The level of national savings is a very important measure to determine economic growth. Higher national savings means a higher possibility of economic growth. So, pension funds stimulate economic growth by increasing the level of national savings.
Also, we know that when people save on pension funds, they receive an interest. This interest income can increase the level of current national income. Because national income comprises four components. They are interest, profit, wage, and rent. So, increasing interest income means increasing the national income level. When we think about Malaysia, for the year 2020, the annual interest rate for the EPF was 5.2% for conventional savings and 4.9% for Syariah savings. (RinggitPlus, 2021).
4. Pension funds stimulate the expansion of the financial organizations
When we consider private pension plans, they act as a method of investment. Also, private pension plans reduce the government burden on pension plans. Because when people have private pension plans there is less requirement of the public pension plans. On the other hand, private pension plans increase the funds for financial institutions such as insurance companies. (Bijlsma et al., 2018). This will help to expand the capacity and operations of the financial organizations and financial market activities which greatly assist in the economic growth of a country.
5. Pension funds stimulate the investment in small and medium-sized enterprises and education
After the retirement, majority of the elder people engage in small and medium-sized enterprise (SME) activities such as agricultural, art and craft, grocery shops, and so on. This also can be identified as a method of investment. So, retired people again contribute to the GDP by generating new income for the economy. According to the survey was conducted in Brazil, after retirement people have shifted to the agricultural sector. (Kidd and Tran, n.d.)
Also, people who have a pension plan provide money for the educational purpose of their grandchildren. We know that education is a way of investment that can increase the quality of future human capital. If a country can invest more in education, it will increase future economic growth. So, pension funds increase the future economic well-being. (Kidd and Tran, n.d.)
6. Pension plans decrease poverty.
If people do not have any income after retirement, they may be financially disabled. They will not have any way to finance their expenditure for food, clothes, and so on. This may create a poverty situation in the nation. Poverty means the inability of people to fulfill their necessities of life because of the lacking of resources. (Okalow, 2019). Although a country records a higher level of GDP, if that country feels from poverty, it does not economically successful. So, pension plans provide a great contribution to the nation by reducing the level of poverty which is a requirement for economic growth.
Also, as I mentioned above retired people invest pension funds in SME. This also reduce the poverty of a country. Because most of the employees who work in small business are lower income level people. So, pension plans will help to generate income for the lower income level people.
Bijlsma, M., Bonekamp, J., van Ewijk, C. and Haaijen, F. (2018). Funded Pensions and Economic Growth. De Economist, 166(3), pp.337–362.
Blackbun, J. (n.d.). ECONOMIC ASPECTS OF PENSION PLANS.
Kidd, S. and Tran, A. (n.d.). Social Pensions and their Contribution to Economic Growth.
Okalow, S. (2019). What is poverty? It’s not as simple as you think. [online] Worldvision.ca. Available at: https://www.worldvision.ca/stories/child-sponsorship/what-is-poverty.
RinggitPlus. (2021). Historical EPF Dividend Rates. [online] Available at: https://ringgitplus.com/en/blog/personal-finance-news/historical-epf-dividend-rates.html#:~:text=For%202020%2C%20the%20EPF%20dividend [Accessed 22 Mar. 2021].
Thomas, A. and Spataro, L. (2014). THE EFFECTS OF PENSION FUNDS ON MARKETS PERFORMANCE: A REVIEW. Journal of Economic Surveys, [online] 30(1), pp.1–33. Available at: https://onlinelibrary.wiley.com/doi/pdf/10.1111/joes.12085 [Accessed 26 Apr. 2020].