Economic Theory

What’s “progressive” about absurdly generous pension systems?


Twitter has been getting very excited lately about the protests in France.

In case you missed it, President Macron is planning to gradually raise the retirement age from currently 62 years to, eventually, 64. This may not sound especially radical but, France being France, it has triggered the usual all-out protests, with a turnout of well over a million people across more than 200 cities.

Macron’s plans have no obvious implications for Britain, but Anglo-Twitter’s excitement has more to do with the aesthetics and vibes of the protests than with the policy content. Photos of mass protests, especially when generously garnished with red flags, can look a bit like a Socialist Realism painting, and given that the British proletariat has turned out to be a rather unreliable ally in the revolution, Anglo-Twitter has to look for an ersatz-proletariat elsewhere.

Nonetheless, I never quite understood why increasing the retirement age is considered ‘right-wing’ or ‘neoliberal’, and therefore bad, while freezing or lowering it is considered ‘left-wing’, and therefore good. The purpose of a state pension system is not to redistribute from capital to labour, or from rich to poor. It may do a bit of that on the side, depending on how it is designed, and it may be complemented by a means-tested programme which does. But the main purpose of a pension system is intergenerational redistribution, not redistribution between social classes or income groups.

Public pay-as-you-go pension systems collect contributions from those below a certain age, and disburse the funds among those above that age. This is no more ‘progressive’ than, say, round-buying at the pub (although it is more like a staggered round-buying system, where you have to buy drinks for other people first, and then people who arrive at the pub later will buy drinks for you).

Round-buying, of course, does not involve systematic redistribution over the course of an evening. It changes the timing of your payments, but not the overall amount. It would therefore not be ‘right-wing’ or ‘neoliberal’ if someone suggested going to a cheaper pub next time, and it would not be ‘left-wing’ if someone suggested that next time, everyone should buy a round of champagne rather than a round of beer.

For the same reasons that round-buying does not make you any richer, neither does a generous pension system, over the course of a lifetime. It just means that you will be poorer in your younger years than you would otherwise have been, and richer in your later years (where ‘richer’ can refer to cash terms, or it can mean that you can afford to retire at an earlier age than you otherwise would have).

The French pension system is certainly very generous. Compared to their British counterparts, French pensioners spend, on average, more than three-and-a-half years longer in retirement. That is, in part, because French life expectancy exceeds ours by more than a year, but also because they retire earlier – not just officially but also in actual practice. If we look at employment rates among people in their mid-to-late 50s, France and the UK appear quite similar. After the age of 60, however, they diverge sharply, because employment rates now drop steeply in France, and only slowly in the UK. Only one in three French people in their early-to-mid 60s are still in work, compared to over half of British people in that age group. One in four Brits still work in their mid-to-late 60s, compared to less than one in ten French people.

Combined with higher pension levels, this means that the French pension system is substantially more generous than its British counterpart. But that generosity, of course, has to be paid for. France spends a little over 14% of its GDP on old-age benefits in cash and kind, compared to just 6% in the UK. This is, again, not redistribution from the rich to the poor, or from capitalists to workers. It is merely redistribution from those who were born after a certain cut-off date to those who were born before it.

But if making the pension system less generous is neither ‘neoliberal’ nor ‘right-wing’ – why is it so unpopular? 

The answer is that even if a pension system is not in itself redistributive, changes to it still create winners and losers. Suppose you have already bought several rounds at the pub, and then the group decides that from now on, ‘a round’ means buying half-pints, not full pints. Had that been the rule from the moment you arrived, you might have been fine with it. But now, half-way through the evening, you have already bought several pints for others, and will only receive half pints in return. You may be indifferent between the ‘generous’ and the ‘minimalist’ system, but what you don’t want to do is buy drinks under the generous system, and receive them under the minimalist one.

But that does still not make it a Left-vs-Right issue, let alone a capitalism-vs-socialism one. The reason why Macron is doing this is simply that fewer people arrive at this pub to buy rounds, while the people who bought the last couple of rounds are sticking around for longer. (Yes, I realise that I’m stretching the analogy a little.)

Under such conditions, something has to give, whatever the ideological orientation of the government, and whatever the economic system. Indeed, socialist regimes such as the Cuban one are facing very similar issues, and respond to them in very similar ways. The only difference is that when Fidel Castro raised the retirement age and tightened eligibility criteria 15 years ago, he did not have to worry about protests.

 

This article was first published on CapX

 

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Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).


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