Three basic things CAUSE pain and suffering:

•  As a result of our own sins : sin which rips apart the fabric of Divine Providence or God's perfect plan would, by definition causes the sinner, suffering. 
   
• As a result of the sins of others: Unfortunately sin does not only bring suffering and pain to the person who committed the sin but to many people around the sinner and sometimes to people who don't even know the sinner.

"The sins of the parents are laid upon the children and the grandchildren"

• As a result of environmental events and factors - for example, hurricanes, floods and fire cause human suffering as does disease. Aging can also cause suffering

God allows us to suffer for the following reasons:

• To make us aware of our need for God and to draw us closer to Him:  Many people have stated that illness and suffering caused them to increase in spirituality and thus the catastrophic event (like cancer etc) was a positive event in their lives.  It is well known that privation teaches us far more than easy times. Often it is while in bed, ill, that we find the time to pray more.
   
• To help us to minister to others for unless we have been through something similar to what they are suffering, we will find it difficult to empathize with them.
   
• To allow God to make us stronger so we can withstand the trials of life better.  The world considers sacrifice in order to make more money a worthy pursuit. It is well known that any worthy pursuit is not obtained without a certain amount of pain.
   
• To give us the opportunity to allow God to help us love others unconditionally (i.e. for example when we suffer as a result of the sins of others, we can ask God to make it OK for us and the sinner)
   
• A few selected individuals who in this life have achieved a special closeness with God are asked by God to suffer as a prayer to help others - this type of suffering is called "redemptive suffering" and is reminiscent of how Jesus died for us.  Jesus told us we were His Hands and His Feet. An example of redemptive suffering was the privation and illness that Pope John Paul II suffered for several years toward the end of his life. NOTE: most of us are NOT called to "redemptive suffering".

All suffering is not, of itself, helpful.  We must turn it over to God and "God will make all good for those who love Him".

Bishop Sheen said it well "Suffering is like a blank check... worthless unless signed by the Hand of God"

Resource: Fr Robert Spitzer, SJ: Healing the Culture

Fulton Sheen "Life is Worth Living"

Is suffering a punishment?

In a word, "no".  In fact, since God allowed HIS MOST BELOVED PEOPLE, the saints to suffer immensely, most from childhood on, with sickness, poverty and humiliation, if we have suffering in OUR LIVES, we can take that as a compliment. You see it would be MUCH EASIER for God to just allow us to flow with the world because if we are talented people and can easily get acclaim for what we do, then God has to go through no small amount of work to ruin that for us so we end up with humiliation and poverty.  And he does that for ONLY ONE REASON. Because it is in humiliation and poverty that we can REALLY SEE God and of course, seeing God is the only real happiness in this life and the next.

Riches ---> Fame ----> lead to pride which fools us into thinking WE are gods and leads us AWAY from the Consolation of God

Poverty ---> Obscurity and Humiliation ----> lead to humility in which we know that we are TOTALLY dependent on God. It is in humility that we really can see God and if we can see God, that is the ultimate happiness in life.

Resource: The Spiritual Exercises of St Ignatius Loyola