Pensions are not normally an issue to provoke violent passions. It is the dry subject of retirement finances, however, that has helped to bring crowds on to the streets across the world. Strikers and protesters in Chile and France, as well as academics in the UK, are enraged that the promises made to them about how much money they would receive in old age, and where it would come from, are being withdrawn. This is a global phenomenon. People are having to recognise that the leisurely old age that their parents enjoyed, often paid for by taxpayers, will not be available to them. The sins of the fathers — overgenerous promises made by successive generations eager to secure votes — are once again being visited on the sons and daughters.
The pension systems in France and Chile are at the extreme ends of the spectrum but in each case people have woken up to the fact that they will not have enough on which to retire. Chile’s system, a defined contribution scheme, was heralded as the “Mercedes-Benz” of pensions when first introduced in 1981. It gave people responsibility; Chileans invest their savings in privately managed funds. By many measures, it has been a success; it has helped the country to manage its public finances and helped boost economic growth. But the people are now discovering they have not contributed enough to pay for adequate pensions.
In France, President Emmanuel Macron is the latest leader to try to tackle the strain that pension promises put on the public purse. The cost of the current system, as a percentage of gross domestic product, is, at 14 per cent, among the highest in the world. The last serious attempt was in 1995 when then prime minister Alain Juppé’s proposed reforms paralysed France for almost a month, only to end in a government retreat. Mr Macron wants to put an end to the 42 retirement schemes and instead introduce a single points-based system that would give all workers the same rights.
Both situations highlight the common thread for advanced economies: the unsustainability of their pension systems as people live longer and the number of retired workers grows. A recent report by the OECD showed that during the past 40 years the number of people older than 65 per 100 people of working age (20-64) increased from 20 to 31. By 2060, this number is likely to have almost doubled to 58.
In the UK, the Office for National Statistics projects that more than 24 per cent of people will be aged 65 or older by 2042, up from 18 per cent in 2016. And while people are retiring later, the rise in the total number of over 65s is far greater than the increase in older workers in the past 20 years. In other words, a growing number of pensioners are being supported by a shrinking working-age population. Labour’s pledge to compensate women who were left out of pocket by a rise in the state pension age has rightly come under scrutiny.
Something has to change. The statutory retirement age will have to rise, as will personal contributions. Policy innovations such as linking retirement ages to life expectancy, as the UK and Denmark have done, should be part of any long-term solutions. Policymakers should consider the changing labour market; more people are in temporary or part-time jobs and do not have access to workplace pensions.
The solutions are clear, but politically unpalatable; the biggest challenge is not so much the shortfall in pension funds but the shortfall of honesty among leaders in confronting the problem. Society, too, needs to accept that changing funding mechanisms will only go so far. A cultural shift is needed — one that reimagines what retirement really means.