Home > Uncategorized > Pensions: an Iznop game? (three graphs)

Pensions: an Iznop game? (three graphs)

Does Europe have to panic about pensions? Or about unemployment? Paul Samuelson famously wrote, back in 1967,

Social security is a Ponzi scheme that works. The beauty of social security is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he paid in – exceed his payments by more than ten times (or five times counting employer payments). How is it possible? It stems from the fact that National Product is growing at a compound interest rate and can be expected to do so as far as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up with 3% a year, the taxable base on which benefits rest is always greater than the taxes paid historically by the generation now retired…. A growing nation is the greatest Ponzi scheme ever contrived

Samuelson was of course right. Here you find (in french) an INSEE study which calculates that (due to the fact that about ten years ago french pensions were not indexed to wages anymore but to inflation) the burden of french pensions will not increase, thanks to growing labour productivity. France however has a relatively high fertility rate (about 2,0, just below the replacement level of 2,1). Countries like Germany and Italy and Spain however have fertility levels of only about 1,4. And, to paraphrase Samuelson, ‘Always there are more old folks than youth in a shrinking population’. Is this a problem? Not entirely. Dear comrades and (what’s the female equivalent?), unemployment in the EU is at a historical high of 12%, putting these people to work will mean less unemployment benefits and much more production, which will pay for the pensions problems and the more so when we add productivity increases. Also, fortunately and wisely, during the Ponzi-days the de facto retirement age was lowered all over Europe, which means that at this moment there is, surely in Southern and Eastern Europe, a large labour reserve (graph 1). True, after about 2000 labour participation rates of this age group increased everywhere (graph 2, though there seem to be recent setbacks because of ultra high unemployment). But there still is a large reserve. No reason to panic about pensions. But there is reason to panic about policies wich, for instance by downplaying serious deflation threats and creating a situation of competitive wage decreases, deliberately aim at increasing unemployment – the Troika Iznop game. Aside – the increase in the participation rate is not just a gender effect (graph 3). Source: Eurostat.




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