Interest rates might seem like fees to borrowers, but to lenders, they represent profit. We use the same word, “interest,” to refer to two completely opposite things: something that is “taken” and something that is “earned.”
Whether it’s the interest on debt or the interest on profit, people may unconsciously differentiate between the two terms when speaking. However, few people would unknowingly go into debt. On the other hand, many people are unaware that they are actually lending money.
For example, consider bank deposits. We typically deposit money we don’t need immediately into a bank. The bank then uses that money to make loans and earn profits. The interest you earn on your deposit is essentially a “thank you” for lending your money to the bank. So, rather than just depositing money, you are, in fact, lending it to the bank.
Another example of lending without realizing it is retirement pensions. We contribute to the national pension system, and when we retire, we receive that money back with interest. In this sense, the pension system can be seen as the government borrowing money from us.
Pensions are a long-term system where the government collects premiums from citizens and manages them, which naturally involves interest rates.
One major issue with retirement pensions is the problem of underfunding. This shortfall occurred because when the government designed the pension system, it was overly optimistic about future projections.
At this point, it’s important to understand the concept of the “discount rate.” The discount rate is based on the idea that “the value of $100 today is not the same as the value of $100 in the future.”
For example, if you invest $10,000 at an annual return of 5%, you will have $10,500 after one year. In other words, $10,000 today is equivalent to $10,500 in the future.
By setting the discount rate high, the amount of premiums that need to be collected is reduced. The government set the pension discount rate—effectively the interest rate—too high, leading to insufficient savings.
This problem remains unresolved. The reason people say that “the pension system may eventually collapse” is because of this issue.