Private pension funding "significantly" enhances individual wellbeing by improving financial security, whilst pay-as-you-go (PAYG) based public pensions are often associated with lower financial security, research from the Network for Studies on Pensions, Ageing and Retirement (Netspar) has revealed.

The study, which examined the impact of national pension systems on subjective wellbeing across 18 economies, revealed greater reliance on private, funded pension arrangements enhances individuals’ financial security, which in turn contributes positively to wellbeing.

In contrast, pension systems that depend heavily on PAYG financing are associated with lower perceived financial security and, consequently, reduced wellbeing.

Some geographical differences were seen, as the impact of pension financing structure on wellbeing is more pronounced in countries with higher levels of population ageing.

However, the report suggested that cross-country differences in financial security can be explained by two key mechanisms: the ageing-discount effect, which undermines the long-term perceived value of both PAYG and funded pensions; and the trust-based confidence effect, which helps mitigate ageing-related concerns.

According to the report, in funded plans, the confidence effect is stronger than the ageing-discount effect, indicating that trust can offset demographic concerns and bolster perceived pension security.

In contrast, PAYG pensions appear more vulnerable to ageing pressures and less responsive to trust, likely due to their political character.

The report suggested that these findings reinforce the interpretation of financial security as a subjective filter through which individuals assess the sufficiency and reliability of their pensions.

While replacement rates offer objective measures of adequacy, it argued that their influence on well-being is mediated by how trustworthy pension promises appear in light of demographic trends and institutional trust.

Despite the geographical discrepancies, the review confirmed that the results remain consistent when accounting for key determinants of subjective wellbeing, such as interpersonal trust, social expenditure, and GDP per capita.

The report authors suggested that the consistency of these results across both country-level and individual-level analyses reinforces their relevance for policy.

"More broadly, our findings highlight the crucial role of pension institutions in shaping financial security and life satisfaction," it stated.

"Given their material importance over the life course, pension systems warrant a more prominent place in the academic literature on subjective well-being."

In particular, the report suggested that increasing the role of funded pension systems—while reducing reliance on PAYG arrangements could enhance overall well-being.

However, the report acknowledged that implementing such a transition is far from simple, as moving from PAYG to a funded system involves the so-called "double burden dilemma".

This is due to the fact that the working population must simultaneously finance the pensions of current retirees while saving for their own future benefits, which means that replacing PAYG with funding cannot be done without imposing significant costs on one or more generations.

"As a result, countries with predominantly PAYG systems must accept pensions-induced lower levels of subjective wellbeing as they have limited reform options," the report said.

"The most viable approach is to introduce parametric adjustments that equitably distribute the ageing burden across generations—such as raising the retirement age, reducing benefit levels, or building an ageing reserve through partial pre-funding."

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