One of the most outstanding achievements of the 20th century was the creation of the welfare state in most European countries. It was a powerful expression of social solidarity. One of the pillars of the social support system was a pay-as-you-go state pension that citizens should get after working and paying national insurance instalments after a lifetime of work.
Locally, the pensions initiatives of the 1970s seemed ambitious and fair at the time. The state guaranteed two-thirds of the final salary pension for those who met the necessary contributions requirement. However, there were ceilings set on the national insurance instalments and the maximum pension payable on retirement at age 60. Soon the system’s inadequacy to cope with demographic changes, changing lifestyles, inflation and the impact of technology on jobs became increasingly evident.
Most European governments realised they needed to change the old pensions model. They encouraged workers to save more to not depend on state pensions in their retirement. Others raised the retirement age often against a backdrop of popular resistance. Many workers see retirement as a Holy Grail to be pursued with vigour to get out of jobs they hate. Still, the retirement revolution may only now be starting.
The social contract that prevailed in the latter half of the 20th century is broken. It needs urgent fixing as it has become unsustainable and often unfair to most people. French President Emmanuel Macron warned the French people: “We can’t keep putting off the day of reckoning.” French voters are not impressed. They do not want him to raise their pension age to 64.
Current pension models are outdated as they have a one-size-fits-all approach to retirees’ realities. There is a growing gulf between citizens who still enjoy healthy and comfortable lifestyles when they hit 70 and those who are “old” due to deteriorating health, inadequate financial support, or limited assistance to care for vulnerable family dependants.
Life expectancy in most European countries has doubled since 1881 when the German Chancellor Otto von Bismarck introduced an early version of the state pension. While this social advancement has been hailed as an outstanding achievement of medicine, the benefits are not shared equally or even fairly.
Life expectancy depends on a number of factors. Genetics play an important role. But so do the level of education, diet and income. While no one can protect against an accident or a nasty disease, higher-income people are more likely to live longer than their lower-income compatriots. Social research confirms that the richest fifth born in 1960 in western countries live 13 years longer than the poorest fifth.
A collective effort is needed to define a new social contract with a common goal that will prepare every worker for retirement
The state pension systems are not risk-based on how they treat retirees. A recent study of older British and American people indicates that “the wealthy can expect around eight to nine more healthy years of life than the poor”. The healthy life expectancy gap is growing in most countries. It is highly correlated with poverty, which can lead to stress and poor diets.
Put simply, the long-lived elite is increasingly getting more than its fair share from welfare states that should be protecting the needy. Increasing the retirement age and linking it to longevity is reasonable, even if politically unpopular, as President Macron can confirm. This is by no means a simple solution. Policymakers must recognise that hard physical work may not be possible in old age. Pension credits resolve part of this problem.
Retirement reforms also need to avoid the moral hazard that will become inevitable if reformed pensions policies give people more support based on their individual expectations for a healthy life.
While popular resistance to reform is inevitable, the need to rewrite the social contract is becoming urgent. The gap between the haves and the have-nots in society creates social tensions not seen since the middle of the last century. Moreover, deteriorating demographics in most European countries is beginning to convince employers to abandon their ageist mindsets that prevent healthy older workers from postponing their retirement.
Sustainability, adaptability and a sense of fairness and solidarity are central to the long-term success of the new social contract. A collective effort is needed to define a new social contract with a common goal that will prepare every worker for retirement. Public policymakers, employers and trade unions will need to work in harmony to develop retirement systems based on these principles.
In next week’s article, I will suggest some essential design features that could be the rock base of a new social contract.