Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

EU public consultation on pension "reform"

by JakeS Thu Oct 21st, 2010 at 07:15:56 AM EST

In the recent comment thread on the French protests, Mig reminded me that there is an EU consultation on the subject of pension reform, and suggested that I draw up a draft response that ET could polish for shipment.

So here goes.

Part One: The Premises

The justification for the consultation is itself worth responding to, as it attempts to enforce a number of framings that are simply objectively false.

Ageing populations in all Member States have put existing retirement systems under massive strain

This is not generally true. The European member states are in varying stages of their demographic transition - some have it before them, others behind them. The demographic picture is a lot more nuanced than it is painted in this call for papers.

and the financial and economic crisis has only increased this pressure.

This, again, is not generally true. It is only true for those member states who have (foolishly) structured their retirement schemes as if they were hedge funds. For those states who fund retirement benefits from direct sovereign outlays, the financial crisis poses no problem for the retirement schemes - indeed, during a demand-side economic crisis generous retirement schemes are a feature, not a bug, of macroeconomic policy.

the pension challenge - one of the biggest facing Europe and most parts of the world today

It is a little hard not to wax sarcastic about this. Fossil fuel depletion? Financial regulation? Mainstream European right-wing leaders acting all nostalgic for fascism? The de-industrialisation of every part of Europe outside Poland and the Ruhrgebiet? Apparently those are chopped liver next to the all-important need for reform.

László Andor, EU Commissioner for Employment, Social Affairs and Inclusion said:

"The number of retired people in Europe compared to those financing their pensions is forecast to double by 2060 - the current situation is simply not sustainable. In addressing this challenge the balance between time spent in work and in retirement needs to be looked at carefully."

This is a shockingly deceptive framing.

The number of retired people relative to the number of working-age people is completely irrelevant. The relevant figure is the number of working-age people relative to the total population - including those who are too young to be in the working-age population. Properly accounting for those who are below working age offsets the increase in those above working age to a considerable extent in those countries member states that have a declining population (and those member states that have a growing population are not scheduled to have a demographic crisis at all over the period covered by Eurostat projections).

In particular, [the consultation] aims to address the following issues:

  • Ensuring adequate incomes in retirement and making sure pension systems are sustainable in the long term

  • Achieving the right balance between work and retirement and facilitating a longer active life

  • Removing obstacles to people who work in different EU countries and to the internal market for retirement products

  • Making pensions safer in the wake of the recent economic crisis, both now and in the longer term

  • Making sure pensions are more transparent so that people can take informed decisions about their own retirement income

The consultation period will run for four months (ending 15 November 2010) during which anyone with an interest in the subject can submit their views via a dedicated website. The European Commission will then analyse all responses and consider the best course for future actions to address these issues at EU level.


Part Two: Analysis

Coming soon

[Taking a leaf out of Mig's book here...]

- Jake

Display:
I've a suggestion to add: we should also aim to produce a briefing note of no more than two pages summarising useful arguments against the CW on pensions, and distribute it to Political and union leaders and advisors. The standoff in France would be harder on the government, imo, if parties on the left, and unions, had some good reframing points to counter the endless "it's inevitable, it's common sense" line.

This note could be produced once the main points of a Consultation submission were worked out.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Oct 21st, 2010 at 08:01:57 AM EST
An old comment of mine:
Going back to JakeS' logic
The intuitively obvious corollary to this is that we need to get out of the private pension funds mindset - by their very nature, private pension funds make Joe Schmoe an investor in the securities markets. And Joe Schmoe knows nothing about investing in the securities market, so he shouldn't be doing it.
the way I put it is this:

We understand that "widows and orphans" shouldn't be investing in risky assets and so we create "pension funds" subjected to strict regulations on the kinds of assets they may hold (e.g., no "speculative" or worse-rated bonds) and the kinds of strategies they may pursue (e.g., no "short-selling") so that they may be "safe" for widows and orphans to invest in. But that means that we regulate pension funds to behave like widows and orphans, so they get scalped by sharks like widows and orphans would.

In addition, the whole "private pension fund mindset" is predicated on the argument that public pensions are insolvent because they will eventually be unable to pay the promised premiums. We are told that instead we should invest in private pension funds. But the question arises: if the government is not going to be able to raise the necessary cash to meet its pension liabilities, where is the stock market supposed to get all that cash from? After all, the government and the stock market share in the same GDP pool. In addition, the government's "cost of capital" is lowest (in absolute terms considering "cost of debt" and relatively speaking when "risk-adjusted").

(with added emphasis)

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 21st, 2010 at 08:50:26 AM EST
Mig:
...the whole "private pension fund mindset" is predicated on the argument that public pensions are insolvent because they will eventually be unable to pay the promised premiums.

Adding that whatever gains accrue in private pension funds invested in financial markets will be less the very substantial costs extracted from those gains by the private entities doing the investment, the expected rate of return for which is 15-20%. Surely the proponents of privatized retirements do not imagine that the private sector will be performing this service out of altruism!

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 21st, 2010 at 11:05:37 AM EST
[ Parent ]
And also noting that the returns to the funds running the scheme will be extracted and distributed regardless of whether the long term goals for the fund are realized or not. As very recent history has shown, one bad year can wipe out more than a decade of apparent gains.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 21st, 2010 at 11:13:50 AM EST
[ Parent ]
The real problem is to reason in the Austrian/gold-bug frame that "money is a thing".

The issue here is to dedicate x% of GDP to supporting retired people (and other entitlements) and whether that is possible/sustainable. A reasonable value of x% is always possible and, by definition, sustainable for any reasonable choice of x.

One way to do this is for that to be a sovereign outlay and to collect y% GDP in taxes to fund that, and other government programmes.

People think they can pay z% in taxes, and save (y-z)% into a private investment scheme.

But the fact is that money is not a thing and sovereign outlays are not in a zero-sum game with taxes and savings.

However, the illusion that money is a thing seems to be psychologically necessary in order for a fiat money system to work. Because, if people think that fiat money is not a real thing they will think it's worthless and destroy the fiat part of the fiat money system.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Oct 21st, 2010 at 11:39:01 AM EST
[ Parent ]
The real problem is to reason in the Austrian/gold-bug frame that "money is a thing".

Exactly.

And, just as shoveling 1 megawatt into a TV results in a TV that don't work so good, shoveling hundreds of billions into an economy that cannot or does not usefully, e.g., Housing bubbles, use the money results in an economy that don't work so good.

However, the illusion that money is a thing seems to be psychologically necessary in order for a fiat money system to work. Because, if people think that fiat money is not a real thing they will think it's worthless and destroy the fiat part of the fiat money system.

Most people only want to take "money" - whatever it is - down to the local shop and exchange it for a can of beans.  If they can do that they don't care if it is "backed" by gold or fried rat tails.  Economic policies based on "Money is a thing" are only psychologically necessary IFF the Economics one brings to the game is based on "money is a thing."  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Oct 21st, 2010 at 12:44:53 PM EST
[ Parent ]
I agree that a large part of the problem is the misapplication of the idea that money is ONLY a thing. The paper money in your wallet is a thing and has current value. How that value varies over time is a function of government policies and the operation of the economy.

But money is also a relationship. This is especially true when there are significant time periods between the incurring of a debt and the payment of that debt. This is especially true, in the USA, for the "pay as you go" Social Security System. Opponents of that system convinced all to make the system more solvent, on a "money is a thing" basis, back in the late '70s early '80s, and so we did, by significantly increasing the withholding taxes for SS and Medicare.

But the "money is a relationship" aspects were flouted and the extra withholding was not used in ways that would help the society pay the debt when it came due. Instead it was used to paper over massive deficits that resulted from Reagan Administration tax cuts for the rich and increases in defense spending. Keynes had warned that there were problems involved in inter-generational wealth transfers and this sorry episode is example one, for the USA especially.

The idea that "We increased taxes to adequately fund retirements, but corrupt governments have squandered that money on tax breaks for their rich buddies and now want to blame the victims" argument should be very appealing to older demographics. The example should be a warning to younger demographics as well.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 21st, 2010 at 01:51:38 PM EST
[ Parent ]
Actually money is a rationing and permission mechanism. It's not even a relationship - it's just a way to collect, or lose, permission and reified opportunity tokens.

Austerity is simply rationing. There's no other useful word for it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 21st, 2010 at 01:56:46 PM EST
[ Parent ]
At any point in time, people can only consume what is produced or drawn from inventory. Old people, if not working, can only benefit from services only to the extent that someone is working to provide them.

In that respect, whether it's redistribution or capitalisation doesn't change a thing, only the way the overall pile is shared between those who work and those who don't

The only thing that introduces a change here is if you can call on "work" from elsewhere. The argument for market based pensions is that they can invest in more dynamic countries elsewhere and thus 'import" the wealth back home instead of only relying on the locals' work. But the same is true of a country which has finances sound enough to be able to buy imports directly.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Oct 23rd, 2010 at 09:04:47 AM EST
[ Parent ]
The only thing that introduces a change here is if you can call on "work" from elsewhere. The argument for market based pensions is that they can invest in more dynamic countries elsewhere and thus 'import" the wealth back home instead of only relying on the locals' work.

The problem with that approach always seems to be that the process of calling on "work" from elsewhere so often seems to result in the direction of the benefits from that work flowing to those who controlled the flow of money and products and the costs to those who previously provided the labor, the end result of which tends towards undermining sound finance in the country employing the strategy. As DeAnander noted in another thread, when this result is the reliable outcome of that policy, then, from game theory, we should assume that it was the goal of the policy -- in part, if not in whole.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 23rd, 2010 at 11:15:36 AM EST
[ Parent ]
Oh, dear
In particular, [the consultation] aims to address the following issues:

  • Ensuring adequate incomes in retirement and making sure pension systems are sustainable in the long term
A public pension system based on sovereign outlays is the easiest way to solve this problem.
  • Achieving the right balance between work and retirement and facilitating a longer active life
Neither here nor there, though there's the fact that under many European pension systems, receiving a pension is incompatible with doing any productive work. I think the social function of pensions should be given a good round of thinking. Maybe pensions should not be tied to age but basically for incapacity for work of greater or lesser degree? The current stigmatization of people on disability benefit needs to end, by the way. And it's not totally unrelated to this policy drive to "facilitate a longer active life".
  • Removing obstacles to people who work in different EU countries and to the internal market for retirement products
Please don't mix the issue of people working across borders having trouble collecting pensions (supranational fiscal unification, anyone?) with the "market for retirement products". A dignified income for everyone, retired or not, is not a (finalcial!?) product looking for a freer market.
  • Making pensions safer in the wake of the recent economic crisis, both now and in the longer term
Easy, don't make people's pension dependent on the vagaries of the market. Don't force people to take on a private pension because the public provision is deliberately inadequate. This is a political issue, obviously.
  • Making sure pensions are more transparent so that people can take informed decisions about their own retirement income
This is contradictory. A system where, say, people are guaranteed a particular percentage of median income as their state pension would by definition be "not transparent" or hard to forecast. But precise forecasts are necessary for financial planning of private pensions. But private pensions leave people at the mercy of the vagaries of the capital markets. And state pensions are, we're tendentiously told, unsustainable.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Oct 21st, 2010 at 09:01:40 AM EST
Maybe pensions should not be tied to age but basically for incapacity for work of greater or lesser degree?

That would leave pension entitlements to an individual administrative judgement call.

Given the way the Danish government has pressured Danish officials to make conservative judgement calls on disability benefits fuck over disabled people, I think it's safe to say Do. Not. Want. to that suggestion.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 21st, 2010 at 09:07:50 AM EST
[ Parent ]
A dignified income for everyone, retired or not, is not a (finalcial!?) product looking for a freer market.

--YET! And unless the proponents of privatization of pensions succeed. But it is those proponents desired framing.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 21st, 2010 at 11:10:23 AM EST
[ Parent ]
Why is the EU policy apparatus framing the issue in a way that makes pension privatization the natural outcome and forces any other policy proposal to be argued against the grain?

Are they even aware of their framing? I'm sure if pressed they'd claim to be technocratic and politically neutral.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Oct 21st, 2010 at 11:40:36 AM EST
[ Parent ]
You might consider that the technocrats have been exposed to a massive mis-education in political economics and also that most might have a long standing bias towards the more conservative and, especially, the more wealthy elements of the societies in which they serve. Socialist governments and parties in Europe have been on the defensive for so long that there is now very little left to defend, at least in the domain of popular conceptions of the society and economy. Unless there is effective push back this will remain the case.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 21st, 2010 at 01:57:23 PM EST
[ Parent ]
Socialist governments and parties in Europe have been on the defensive for so long that there is now very little left to defend, at least in the domain of popular conceptions of the society and economy.

They are as culpable as anyone for the misgovernment of the past 15+ years.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Oct 21st, 2010 at 02:48:48 PM EST
[ Parent ]
And I thought you were trying to be charitable to the "technocrats"! Perhaps you meant some scare quotes around the word claim?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 22nd, 2010 at 12:34:10 AM EST
[ Parent ]
So that is what retirement products is! I was thinking canes and hearing aides and such stuff.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Oct 21st, 2010 at 02:38:34 PM EST
[ Parent ]
Previous discussions of health care, which raise some of the same issues.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 21st, 2010 at 09:35:06 AM EST
European Tribune - Health care and mobility
The underlying difficulty, as I see it, in harmonising health care provision across Europe is that there is a multitude of different systems in use, and each national system is funded and controlled by country-level political bodies. Changing this is presumably off the table, as providing a centralised health care authority for the EU would require (given the kind of funding we're talking about here) giving Parliament the power to levy taxes directly upon European citizens and disburse funds directly to operators.

How different are the EU states pension systems today?

Is there scenarios today where workers can get to low or no pension after working in several countries? In effect, does national pensions for example demand that you stay in that country to get a pension.

The other way around, is there pensions that can be received after only a few years work today? Can you work a couple of years in five different countries and collect five pensions designed to cover basic costs? Does this risk punishing states with generous public pensions?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Oct 21st, 2010 at 02:58:23 PM EST
[ Parent ]
Is there scenarios today where workers can get to low or no pension after working in several countries? In effect, does national pensions for example demand that you stay in that country to get a pension.

Yes, and yes.

I have a family member who has worked in basic science in three of the four Nordic countries and (briefly) in Germany. That is to say, in public sector jobs with (supposedly, allegedly) secure pensions. They get absolutely bupkis from one of those three states, and barely a pittance from the other two.

And that's just within the Nordics. Heaven alone knows how it would work - or not, as I suspect the case may be - for someone working equal parts of his life in France, Poland and Germany...

The other way around, is there pensions that can be received after only a few years work today? Can you work a couple of years in five different countries and collect five pensions designed to cover basic costs? Does this risk punishing states with generous public pensions?

Proving a negative is always hard, but my distinct impression is no.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 21st, 2010 at 08:01:47 PM EST
[ Parent ]
So, without introducing a federal pension plan it should be possible to create co-operation by making pension payments transferable between public pensions  to facilitate working in different member states. I assume most public pensions works by withholding a part of your salary and your final pension depends somewhat on total amount withheld. Would transfers work, or is there a better mechanism?

Not that I am against a federal public pension plan, but I think under current management it is easier to get something by pushing for incremental improvement of existing national public pensions.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Oct 22nd, 2010 at 05:31:33 AM EST
[ Parent ]
You'll need some sort of streamlining. Some pension systems have the employer pay into a (private or public) pension fund. Others are based solely on the number of years you have worked. Yet others are based on the number of years you have lived in a country, or been a citizen of the country.

Being able to transfer pensions across borders would, perhaps, help (or it would create a carry trade in which pensions adjusted for high cost of living countries are taken to low cost of living countries, which may or may not be a good thing). But some harmonisation will be necessary to make the system practical.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 22nd, 2010 at 06:00:41 AM EST
[ Parent ]
I'm starting to think about getting around to informing myself about this question, as I would like to have my early working years in New Zealand credited to my French retirement (in case I should wish to stop working before age 68).

What I hear is that it's quite feasible, as long as I can dream up some pay slips or something. It's a matter of bilateral agreements. Is France unusually good in this respect? Why would the Scandies, in particular, be so lousy on this question?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Fri Oct 22nd, 2010 at 07:01:03 AM EST
[ Parent ]
I took my Finnish pension a couple of years ago at 65, but continue to run my company - though with far less pressure to find new business. I take a small salary to cover the company benefits I still receive.

When I talked to my pension fund about 'retiring' they were very helpful, and also indicated at what levels I could still receive personal income (royalties, voiceovers etc) without getting tax penalised. They also asked if I'd had a pension scheme in England. All I could recall was that there were some irregular payments - I was working as a freelance director-cameraman during the period. I didn't think those payments would be significant.

My pension provider did all the legwork, found my pension in England and I now get an additional monthly sum.

I have nothing but praise for the service that was provided.

You can't be me, I'm taken

by Sven Triloqvist on Fri Oct 22nd, 2010 at 07:27:14 AM EST
[ Parent ]
I'd bet part of the problem for smaller countries is that the odds of a bilateral agreement being signed would increase with the sizes of the countries - France-Germany being much better in that respect than, say, Finland - Malta ?

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Fri Oct 22nd, 2010 at 08:00:24 AM EST
[ Parent ]
Here's an attempt at summarising the discussion on the hot France thread. It may be seen as too cursory, in which case go ahead and add to it!

On the France Is Heating Up thread, Jake S stated as a general principle that retirement pensions were a distributional question, not a generational one.

As a general point applying to sovereigns: there was "no causal relationship between the outlays of a sovereign state and its tax revenue". Taxes are not raised to pay for public spending, which is carried out by creating legal tender ex nihilo. (Taxes serve to destroy legal tender, thus preventing inflation). A sovereign that deficit spends today will not be unable to do so tomorrow.

In this context, it doesn't matter to future taxpayers what this generation decides about the retirement age. If taxes appear too heavy to taxpayers in the future, that will be an issue for them to deal with at that time.

Beyond the general point, France, in particular, has no demographic imbalance to correct for - if it is able to distribute income to the retired now, it will not encounter any major problems in doing so over the next forty years. According to demographic projections, the ratio of the active age group (20-60) to the whole population will remain fairly stable at approximately one half.

marco posted two data items from INSEE (French statistics institute):

These bear out the overall point that the projections show no major shift in the roughly 50% proportion of the "active-age" group within the whole population. The "dependence ratio" remains the same.

gk suggested there might be a political difficulty in persuading people they had to consecrate more resources to the older part of the population (60+) than to the younger (20-). In particular, if the transfer towards the elders is done by government while transfers towards the young are private and "preferred".

afew posted a quick search for figures (2005) that showed that public transfers towards the under-20s were in fact higher than towards the over-60s, in a ratio of approximately 5:4.

According to the projections, Jake S also said, the rise in the older segment of the population would be offset by a reduction in the younger, allowing the total expense to remain roughly stable. There is no need for pre-emptive planning at this stage.

An exchange between talos and Jake s was too fruitful to summarise, so here it is in extenso (questions by talos, answers by Jake S):

JakeS:

How does state borrowing enter into this argument of money created and destroyed?

Reasonable people can disagree on that.

One view is that sovereign bonds are a way to take money out of circulation. In this view, issuing sovereign bonds is similar to instating a tax, and repaying sovereign bonds is similar to abolishing a tax.

Another view (and the one I subscribe to) is that sovereign bonds are a form of money - just a less liquid one. So when the sovereign deficit spends, it is printing money whether it "funds" its spending with sovereign bonds or by simply crediting the accounts of the recipients with legal tender. The difference is only in the liquidity (or lack thereof) of the new money, with legal tender being the most liquid and bonds being progressively less liquid the greater their time to maturity.

Which of those two you adopt is a matter of intellectual convenience - they are indistinguishable for the purpose of macroeconomic planning.

How is the argument affected if the sovereign can't print money (i.e. in eurozone countries)?

Well, the argument hangs on the sovereign's ability to enforce legal tender laws. So as long as the French sovereign can enforce French law in defiance of the Bundesbank, it doesn't change... in principle. Restrictions such as the Maastricht rules are voluntary restrictions on the behaviour of the sovereign, not fundamental facts of economic life.

In practise, this pressure towards deficit errorism is a major problem with the € as currently constructed. But the € as currently constructed is not sustainable on the time scales involved in these population projections - for precisely that reason. So the € will either change to accommodate a pan-European economic policy (in which case macroeconomic stabilisation will become a federal task), or the € will break down and we will return to floating sovereign currencies.

How is it affected if the sovereign has pretty much all of its debt in its own currency (i.e. the US)?

It isn't. There are many possible complications to having debt in other people's currency, but those really aren't in the realm of pensions and labour market regulation - which are almost always exclusively accomplished with domestic legal tender.

This means that various announced projected "costs of pensions by the year 20XX" measured as percentage of projected GDP, are questionable?

Yes and no. It depends on what they mean by that.

It is, obviously, possible to input some assumptions about GDP growth, pension systems and demographics, and get a scenario for the share of pensions in GDP in 20XX. What is dishonest is to discount sovereign outlays and taxes in order to obtain a present value - sovereign budgets just don't work that way.

Now, if the taxpayers of 20XX believe that they are paying too generous pensions, then that is a wholly legitimate political position... in 20XX. But demographic trends are slow-moving, so there will be plenty of time for the people who are actually alive and paying taxes in 20XX to reduce pension benefits if they find their taxes onerous. Arguing that we need to make this decision for them is to presume to speak for the as yet unborn and uncontemplated.

How is this argument affected by demographic decline?

It isn't. See bullet immediately above.

A note: I looked up the numbers a few years ago on Greece (below population replacement rate since 1980) and found that in the mid 2000s the percentage of working age population employed was at an all time high and dependence ratios at an all time low. This was due to a steady increase in female participation in the workforce, of course, but also due to the fact that the under 18s shrank almost as fast as the over 65s. This, I would wager, is pretty much par for "infertile" countries.

That is my experience from looking at the data as well.

Thus the dependence ratio doesn't seem to be too much affected in projections even of the most demographically declining countries - and thus dependents' costs unless old people are much more costly to society than children,

Yes and no. Most projections do show an increase in dependence ratios, albeit a modest one.

[That old people are more expensive than children] is indeed probable.

I wouldn't know about that. I'd have to pull out some consolidated public sector budgets to be sure, but for Denmark I'm pretty sure that they cost the same, or close enough as makes no matter.

One could offer a counterargument to
it makes no difference to future taxpayers what this generation does with retirement age

that any changes in retirement age necessarily unfold over a long period (you can't make someone planning to retire next year, retire in 5 years time and any cuts in pensions should be rolled out over many years so as to not influence life plans and expectations too much).

One could make that argument, but one would have to make the case that the funding problems are going to show up faster than the possible rate of adjustment. Which just isn't the case for any of the major [1] EU member states except Germany. And Germany starts out with large current account and trade surpluses against the rest of the Union, and mercantilist inflation rates; they could print the money to fund their retirement obligations without corresponding tax increases and still be a net exporter and on the low end of Eurozone inflation rates.

Generally as per the "slash pensions argument": aren't, pretty much linear, projections of current trends to 50 years' time some sort of quackery?

Yes, that would be rank quackery. Fortunately, population projections aren't simply linear projections. All reasonably literate societies have very good fertility statistics, and societies with (near-)universal health care have uniformly excellent fertility statistics. We know how many children people have, we know when they have them, we know what the age and gender distribution is today and we know how many people immigrate and emigrate.

Of course you have to make assumptions about how those figures are or are not going to change over the course of your projection. But the assumptions that underpin the population projections of European states are usually not wholly unreasonable.

Especially in a time of unfolding multiple global crises and geopolitical shifts? How is it even rational to project that far into the future any current trend and to implement policy now

The usual justification is that if we have a shock that's big enough to force us to discard our projections, things will be so fucked up that we can't plan for it anyway. So we make plans based on things not going catastrophically wrong - no serious wars, no exceedingly deadly pandemics, no agricultural collapse, etc., because it's silly to get caught with your pants down just because the sky didn't fall.

Your mileage may vary on whether that's sufficient reason or not. That's a political decision that reasonable people can disagree about.

- Jake

[1] Minor EU member states are not worth doing 20-year macroeconomic projections for - their economic well-being is more dependent on what the major EU members do than on any policy of their own. (This should not be construed as an excuse to be negligent in policy planning - just as a statement on the inherent uncertainty of long-term planning for states that are not even halfway sovereign.)

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Oct 21st, 2010 at 03:05:08 PM EST
is that the Social Security system in France (not just pensions, but also unemployment insurance and healthcare) is only in deficit because it's been raided by the government. One of the main routes to do that has been the exemption for business to pay social security charges on low wages (from minimum wages to a threshold, I think 1.4 times that). This is government policy, but the money is taken from the Social Security budget; government is supposed to compensate SS for this, but has a poor track record of actually doing it (or does it correctly the first year, but then puts indexation rules that makes it increasingly less true over time).

A little bit of digging would be needed to find all the numbers, but basically, the Social Security would be in balance now and for the foreseeable future without this.

Some will say that the deficit is just moved from one place to another, but this does matter, as the hole is social security is plugged via worse services, higher contributions (almost exclusively on labor) or smaller transfers, whereas the lower hole in the government budget can then be used to justify tax cuts for the rich, or the lack of tax increases or cuts in other, less needed services (the army, etc).

Just like the SS surpluses in the US are seeing various attempts at being hijacked, the French Social Security system has seen a lot of its sound finances hijacked for other purposes.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Oct 23rd, 2010 at 09:14:32 AM EST
[ Parent ]
The national pensions scheme (in France, at least, and no doubt elsewhere) runs on contributions raised on salaries. These are nominative and confer rights to a future pension (subject to rules on number of contributions).

The contributions received by the scheme are paid out to present pensioners. The state is only called on to make good the deficit, when there is one (there usually is, but a small percentage).

The pension fund's income can thus be said to consist (for the most part) in deferred salaries, earned by work. The outgoings, (pension rights acquired by previous work), go almost immediately to consumption.

Legal tender is used to denominate these flows, but in what sense is it created ex nihilo?

If it can be argued that it is, how can this be the most clearly and persuasively explained to Dummies?

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 22nd, 2010 at 08:35:40 AM EST
Legal tender is used to denominate these flows, but in what sense is it created ex nihilo?

Because the pension system is part of the public sector.

Imagine a water pipe that will support a flow of up to N litre per minute. Putting less water through it yesterday does not mean that you can put more water through it today. And putting more water through it yesterday does not mean that you can put less water through it today.

Your pension contribution is water that was put through the pipe yesterday. It doesn't really matter today, except as a historical record of how the system got to where it is.

Most people think of money as a stock - gold in a vault, or, in our analogy, water in the water tower. If you have a water tower with a limited amount of water, then it does matter how much water you put through the pipe yesterday - you might run out of water. But the magic of legal tender laws is that they create a wholly arbitrary amount of money to begin with: If the water levels in the tower seem too low for comfort, the magic of double entry bookkeeping can instantly conjure as much water as you want for your tower.

Now, that doesn't mean that you can run around spending money willy-nilly. You still have to suit your expense profile to the needs of your industrial policy. But it means that you don't have to choose between suiting your expenditures to the needs of the economy today or the needs of the economy tomorrow.

Now, it is possible to pretend that pensions aren't part of the public sector, in the same way that the operator of our water tower can pretend that he doesn't know how to make water from thin air. But that's a political choice, and those who are less blinkered might legitimately ask why the sovereign is denying itself a useful tool for economic planning.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 22nd, 2010 at 09:53:18 AM EST
[ Parent ]
The Stock-Flow analysis applied to pensions! This goes a long way to justifying the US "pay as you go" approach originally intended. This system was modified in the '80s into one that was "actuarially sound" but that very soundness was converted, by looting, into apparent deficit, and the very existence of that deficit has been used by the looters to call into question the feasibility of the whole endeavor.

When a Stock approach is actually attempted, great care would have to be taken over the disposition of the Stock of money going into the pension both to avoid crashing the economy due to excessive reduction of the money supply, if the withholding is directed into gold, for instance, or loss of the money through mal-investment. Given the outcome we might conclude that the entire point of the US exercise was to create a pool of money that was available for subtle looting.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 23rd, 2010 at 11:37:10 AM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries