Looking for the third way

Article published on Nov. 3, 2003
community published
Article published on Nov. 3, 2003

This article has not been vetted by an editor at Paris HQ

Neo-liberals advocate scrapping state pensions, short-changing present retirees and privatising welfare. On the other hand, those who reject reform offer no coherent alternative. How to reform pensions without dismantling the welfare state?

It is a familiar claim: rising life expectancy and lowering birth rates mean that Europe's pay-as-you-go state pensions are no longer affordable. The number of working people supporting each pensioner has been decreasing, and it is about to fall off a cliff. This gives rise to a depressingly simple equation: if Germany’s ratio drops from 3-to-1 to half that (as will be the case if current ageing and fertility trends continue), either workers must pay twice as much or pensioners must receive half as much – or an equivalent balance of the two. And, while immigration can stem the tide, and increasing the retirement age can make the balance a little more favourable, demographers agree that our population will continue to age.

The conundrum entrenched in a pay-as-you-go state pension system is that, if there is any change in the demographic make-up of a country, the relationship between what a given generation has paid into the system and what they receive from it is altered. If the number of pensioners as a proportion of working population increases, then pensioners must either see their relative standard of living decline (as a proportion of average income) – which has been a common feature of such systems as the earnings link to pensions has been replaced by a correlation with prices – or the current generation of workers must increase the proportion of its income it pays into pensions to maintain the standing of pensioners compared to the rest of society. If today’s pensioners receive the same amount (in terms of society’s living standards as a whole) as previous generations, then the cost to those currently working will be far higher than a generation ago. And the consensus is that this cost is too high. If Austria’s system had remained unreformed, within 20 years, workers would have had to put almost half their wages into state pensions. The rules have changed: we can no longer get back more than we put in. The lottery that banked on most of us dying off before we could reclaim the cost of our tickets has foundered because more of us than expected have been given the winning numbers.

Yet the glib conclusion of the neo-liberals that we should all simply pay for ourselves ignores the Europe's tradition of social justice. In Europe’s most privately-orientated pensions system, Britain, a third of people have no savings whatsoever. And while the label of irresponsibility can be attached to some of these, and especially those willing to save for holidays and cars but not for their long-term futures, it is also true that many people - families eking out an existence on poverty wages - cannot be expected to save for their retirement. Just as the state pension system ushered out the poorhouses, so a wholesale embracement of the neo-liberal system would herald a return to mass poverty among the old. And the problems are similar if we rely on employers to bear the bulk of the burden of pension provision. In a world of so-called flexible employment, the ultra-successful can pick and choose for whom they work, taking their private pension schemes with them, others will spend a comfortable working lifetime with one or a handful of companies offering generous provision, but once more the poor and vulnerable, flit between low-paid low-benefit jobs, will be hung out to dry. And all this aside, companies are today facing an uphill struggle to fulfil their obligations under existing defined-benefit schemes, and scrambling to convert them to defined-contribution schemes. In other words, the great maxim of the non-state pension schemes is: you get what you pay for. But what about those who can’t pay?

In truth, the universal provision and social equity of the pay-as-you-go pension schemes first introduced in 1889 by Bismarck have always been a myth. Their successful functioning was a vital element of the move to social democracy, but a historical flash-in-the-pan. In reality, the poorer you were, the younger you died, and so, while a crucial safety net existed for those defying the odds into old age, the redistributive qualities of state pension schemes were overstated. The post-war baby boom extended the demographic viability of state pensions, but improvements in universal healthcare meant that, once birth rates began to collapse, the feasibility of providing high universal standards of living for a growing body of pensioners fell away accordingly. Realistically, paying for ourselves has to form a major branch of our pensions strategy, now that paying for everyone no longer means just the fortunate few who survive well into their retirement. And given the scale of the crisis, there is every reason for supporting the argument that the cocktail of incentives for saving, forced increases in contributions – be they into private schemes or through an expansion of the state pension – and longer working lives needs to be strengthened rapidly.

But it is vital that alongside this there is provision of a true safety net for the poor and the vulnerable, with a minimum of degrading means testing, paid for in part by increasing across the whole of society a sense of personal responsibility for one’s own future. Meanwhile, the brutal immediacy of the crisis can be softened through borrowing, as birth rates cannot drop indefinitely, and this problem is a historical one-off. This is just a blueprint, and the true challenges lie in the detail, but in order to defend social justice, the state pension must continue to lie at the heart of our retirement provision. And although we must all contribute more in future to society’s pension fund, this is a consequence of the happy fact that there will be more of us around to share it.