The big bad pension scare.
On Voxeu, Hervé Boulhol and Christian Geppert published an article a about population ageing and pensions which tries to scare us: “on average in the OECD, stabilising the old-age dependency ratio between 2015 and 2050 requires an increase in retirement age of a stunning 8.4 years. This number far exceeds the projected increase in longevity and increases in retirement age driven by pension reforms alone.”. The pension age has to go up. But not for the reasons and by the amount they state. What’s wrong with their article?
- Their base line is wrong. They calculate a post 1980 dependency ratio (the number of young and old people per person in the working age) by using a 20 year and a 65 year threshold. During the 1980-2015 period, many people retired before 65 which means that the dependency ratio was higher than calculated in the article. Which in it turn mean that the rise of the dependency will be lower which means that less of an increase in the pension age is needed to stabilize it.
- As they admit in a footnote, they do not take changes in employment rates into account. Employment rates of people and especially women above 50 are rising spectacularly, which means that the dependency ratio per working person rises less than they calculate.
- Their assumptions about the rise of the pension age between today and 2050 is wrong. They assume an increase to 66,5 years of age. At present the pension age in many countries (Italy, Greece) is already while the pension age in the Netherlands and in 2050 even the German retirement age will be higher. This will lower future dependency ratio’s.
- In their world, unemployment does not exist. In countries like Spain, Italy and Greece total unemployment (including unemployment) is however around 25% while in a country like France it is close to 20%. Putting a large part of these people to work will solve a large part of the problem.
- They assume that pensions have to be paid using a ‘paygo’ system, i.e. by taxes. Surprisingly, they assume that only wage incomes will be taxed. One could however also tax capital income (or raise the labour share).
- If need be, people can start to work longer. A 4 hour increase of working weeks which are on average 32 hours leads to a 12,5% in total hours worked per person, which can also solve a part of the problem.
- Productivity can increase. A modest 0,5% increase of productivity per year between now and 2050 translates in a total rise of productivity of 17%. Together with an increase of hours of 12% this translates in a growth of production of 30% per working person.
The pension age has to go up – not so much because people get older but because of demographic reasons. There is a demographic problem caused by fertility rates which are far below the replacement rate. Also, young people must have the time to care for the kids and in many countries the generation of these young people will be only half as large as the generation of the grandparents. Also, from a more socialist point of view, it is good when people keep working (which, however, does not necessarily has to be paid work). The increase of this problem is however not as large as indicated by the authors while our societies have much more untapped potential to solve it than the authors dear to dream.
Aside – I’ve been reading a bit about how many children people and especially women want. Look here and here. On average, they want more children than they get. Why this difference? ‘Life’? A relation with the ‘Incel’ phenomenon? Also, there is a (to me) surprisingly small amount of women who do not want children (between 2 and 4% in OECD countries with available data).
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Real-World Economics Review Blog 
Add to this the old style policy of FILO, now replaced by LIFO, you get a total void in between and nothing but discontinuity, poverty, misery, and regret for all generations, including those lost in between. A total void, and a LOSE-LOSE scenario for all.
Except, of course, and as always for those who work or retire for the fun of it, and have as many children, homes, permanent maids and staff as their hearts have ever desired. For them it is always the exact opposite of all above processes, everywhere.
I know how smart you are, Helen. How? Because you are totally correct technically and funny socially.
Zero is good. One child is fine and two are okay too. Three is stretching things a bit and four or even five, well, that’s nothing like a crime.
Declining population accompanied by full commitment to public education leads to gently declining population with sensitivity honed for healing Earth. This is civilized humanity reacting socially to several sources of tension at once. Intensity of economic activity declines and the fun supply increases. These lines cross at sustainable utopia for life on Earth. I call this the real laugher curve.
Personally I think that a gentle decline of populations is a good thing. Buuut… we do have to adapt our institutions to this. Lower unemployment and a gentleincrease of the pension age! However – such an increase should not be dictated by arithmetic. Long story short: dignity and social bonds, the elderly should not be treated as a throw-away factor of production.
If you implemented $1000/mo. universal dividend for everyone 18 years and older, a 20% discount/rebate “pass on” policy at the point of sale of every business’s product to the next business model on the way to retail and also a 50% discount/rebate policy at the point of retail sale which would automatically double that dividend and everyone’s earned income by at least a factor of two….you wouldn’t have to worry about playing the financial games that Finance’s dominating paradigm of Debt Only currently enforces on the 99%.
In countries like Spain, Italy and Greece total unemployment (including unemployment) […]
Do you mean “including underemployment”?
Only in capitalism is increasing life expectancy a problem! For many pension age does not equal retirement age and for those fit enough it can be viewed as a form of UBI with some work as a top-up. Increasing pension age willy nilly discriminates against people with long-term medical conditions and those in certain occupations – consider a 71-year-old steeplejack or at what age should the Wichita Linesman retire? Anyway, robots don’t need pensions!
Taxes do not pay for expenses (including public pensions) in fiat currency countries. Pensions should be paid because they are needed whether people live short or long lives.
I have never understood why retired people, who are often productive in all sorts of ways, are counted as negatives in the ‘dependency ratio’, while children, who in developed countries are close to completely unproductive, are not. Unless you have an odd demographic curve, more old people means fewer children. Of course, society needs fit young people. The solution to a shortage of those is immigration, coupled with strong trade unions to keep wages respectable and a high social wage in the form of socialised health care, socialised child care, etc.
Maybe I’m missing something?
The real problem here and everywhere is the separation of humans from nature. In village/communal life, there were no pensions! People’s pensions were their children, their neighbours, their home-grown and owned lands and produce, their fresh air, their uncontaminated rivers, their intuitive knowledge of how to survive the harshest of times. Yes, there were problems, often mediated by the tribal leaders, or the equivalent. Sometimes fairly, sometimes not. But people did live longer and genuinely happier lives.
The main problem is Urbanisation (i.e: locking us in purpose-built cages, chaining us to eternal mortgages, condemning us to fear of our unknown neighbours, and to foods and medicines the origins of which is most of the time unknown, and more terrifyingly to doctors who don’t know the first thing about the root causes of stress, poor diet, depression, and are trigger happy with chemically produced prescriptions and have themselves been turned into soul-less computers or suicidal, and I am talking about the better ones here, etc.)
Capitalism is one clever system that has perpetuated the cycle. Self-destructive and self-healing, at an ever-increasing rate of profit, in all its key manifestations.
The pension age has to go up – not so much because people get older but because of demographic reasons. There is a demographic problem caused by fertility rates which are far below the replacement rate.
This is rather dubious, a rare case where the author seems to have swallowed some mainstream nonsense. To quote from memory one of the worlds’ leading demographers, Joel Cohen, in his How Many People Can the World Support – If a country can support a generation as children, it can support them when they’re old.
Is there a bubonic plague that is going to kill everyone of working age? Are the dependency ratios going to reach all-time maximums, higher than baby booms? Has technology (outside of economics) degenerated since the baby-boom era? Is there no prospect of immigration? One has to make extreme assumptions to see a problem.
…what few people understand is that the insurance and pension business know for about 15 years that humans do not get any older or at least not in such a quasi linear way as they used to… hence all the fear and insecurity spread among the young, the working and the old is pure greed, deception and criminal extortion of hundreds of millions of people… the discussions finding their origins in specific political, economical circles are always about the magic of humans getting ever older and that the previous sweet life in old age can absolutely not be financed anymore without working longer. But this is not true. Neither is it true that the old are stealing from the young nor is it true that only because of the greedy old the young will not get any pensions at all… in all discussions the rich are completely deliberately keept out of any systematic social responsibilty relating in any way to their wealth…
These are all excellent observations comparing and contrasting an economics primarily based on profit or primarily on love. As the natural philosophical concept and experience of love IN ACTION is grace-graciousness and the relevant economic aspect and application of grace in a monetary economy is gifting, I suggest we contemplate that fact and the many aspects of that concept. Nations, cultures and civilizations follow and express their underlying philosophies, ethics and zeitgeists. Self actualizing a concept or a paradigm simply takes mental effort and follow through.
All true, not even a simple meal is free. Remember the famous economist’s proclamation “No such a thing as a free lunch”. Love has always been extremely rare, and getting more so by the second.