The Creeping Public-Pension Debacle

If policy was rational and electorates understood the consequences fully for their taxes, no advanced, developed country would have a retirement age for public pensions that is lower than 70. Yet, despite some progress, we remain decades away from that point. Until we get there or beyond, western welfare states will remain unviable, economies sickly and democracies under strain.

The ageing of our societies is the social and economic equivalent of climate change – the problem we all know requires action but which we’d rather leave to future generations to solve. The sentiment is understandable, given the troubled economic and political times we live in. But, far more even than with global warming, procrastination comes at a heavy cost.

Consider France. In 1970 the average effective retirement age for French male workers was 67, roughly the same as the life expectancy in that year. Now it is just below 60, even though male life expectancy is nearly 83. The official retirement age is 65, but in practice public pensions can be drawn rather sooner. No wonder that France spends the equivalent of nearly 14% of its GDP each year on public pensions. For Italy, early retirement is even costlier: it tops the OECD rankings by spending 16% of GDP on public pensions every year.

In all, 13 OECD countries – including Japan, Germany, Poland and Greece – devote the equivalent of 10% or more of their GDPs to public pensions, which means taking money mainly from working taxpayers and giving it to retirees.

When the German Chancellor, Otto von Bismarck, invented the world’s first statutory pension scheme in 1889, he set the eligibility age at 70, an age beyond which few people expected to live. Now, Italians who retire on average at 61-62 can expect to receive their pensions for several decades, perhaps receiving these tax-financed transfers for almost as long as they spent in work.

With the share of over-65s in the populations of advanced countries now at or nearing one-fifth, and climbing rapidly towards one-third, the squeeze on other public spending caused by these pension entitlements is destined to get tighter. Efforts to reduce public debt levels will also get harder, unless there is a miraculous revival in economic growth – a prospect which pensions policy makes less likely, every year.

It is not just a question of whether to be nice or mean to older people. Taxes transferred to pensioners are thereby denied to infrastructure investment, education, scientific research, defence and all the other urgent uses that politicians claim they wish to support. Pensions are not wasted – the elderly spend the money, of course – but they crowd out other government spending that would be more beneficial to economic growth.

Little by little, western countries have been raising their retirement ages. Trades unions and pensioners groups lobby hard against it – under union pressure, Germany even reduced the retirement age for some manual workers in 2014 as part of its new government’s coalition agreement, despite frequently lecturing other Eurozone countries to do the opposite. But the process is also being held up by a myth – that keeping older people in the workforce raises unemployment.

It doesn’t. Economists call this the “lump of labour fallacy”, the idea that there are a fixed number of jobs to go around, so that handing out pensions must help keep younger people in work. But in fact the more that people earn, spend and pay in taxes, the more growth and jobs are created. Delaying retirement will create more jobs, not steal them.

That said, a crucial barrier to rational thinking about working lives is corporate behaviour. At the recent World Demography and Ageing Forum in St Gallen, Switzerland on August 29-31st, moderated by this author, the clear conclusion was that although knowledge of our future population trends is increasingly rich and sophisticated, action to meet those trends falls woefully short. Public policy is one part of the problem. But corporate policy is even further behind.

Companies’ pay and promotion structures are biased strongly towards early retirement, and when costs need to be cut, older workers tend to be shown the door first. Even those that serve the silver market with their goods and services have barely begun to work out how to be more age-friendly in their employment practices.

The long aftermath of the 2008 financial crisis is obscuring the long-term reality we all face. This is that any country that continues to transfer billions of dollars in public pensions to citizens for retirement periods lasting several decades is risking bankruptcy or at best stagnation. Rethinking the length and pattern of our working lives is one of the most urgent tasks we face – as governments, as companies and as individuals.

This article by Bill Emmott was first published by Project Syndicate on October 24th 2016