The long-term sustainability of current pension arrangements is one of the major issues with which advanced industrial societies will have to deal over the next few decades. The projected increase in the size of the older population, combined with a reduction in the number of workers, constitutes a significant challenge to the viability of existing pension systems, which, according to many commentators, need to be substantially reformed. While these general views are widely accepted, there is little agreement as to what the actual size of the pension problem is now and will be in future. Those who have analysed the phenomenon have reached conclusions that range from apocalyptic scenarios in which, if nothing is done, the elderly will appropriate increasing large shares of national income with massive detrimental consequences for the welfare of younger generations (World Bank 1994a; Thurow 1996), to less pessimistic ones, in which the occurrence of an increase in pension expenditure is accepted as a likely development, but it is felt that this will not constitute a major economic problem (Johnson and Falkingham 1992; European Commission 1995).

The evidence reviewed in this chapter suggests that gloomy predictions of a ‘demographic time bomb’ have little credibility. However, it seems clear that, when the baby-boomers born after World War II reach retirement age, pension expenditure will increase quite dramatically over a relatively short period of time. Most likely, this will result in a financing problem.

What is more, concern for pension scheme finances has been heightened by recent economic and political developments.