The aging of populations poses obvious problems to the various Western retirement systems. The budgetary and political balance of pension funding is at the heart of philosophy and the mechanisms that operate all social transfers.
Pensions make the pavement beat. They fuel coffee discussions and government fears. They see the reforms, proposals and controversies succeed one another. Economists Alessandro Cigno and Martin Werding are doing a useful work (even if sometimes arduous with access) by returning to the fundamentals of pension systems. Although riddled with dark equations, their small work has many virtues. Mobilizing theoretical arguments and empirical data it offers a panorama of pension questions, with some remarks and observations as original as it is fundamental.
Stability and generosity of pensions have a negative impact on fertility
The still very high fertility levels in developing countries can be explained by the absence of public retirement systems. For our two authors, the public organization of intergenerational transfers is a key element to seize international differences with regard to fertility, household savings, productivity or even the level of involvement of parents with their children. They clearly oppose the United States, on the one hand, old Europe and aging Japan, on the other hand. Cigno and Werding maintain that the United States is young and demographically dynamic because the American pension system is of low magnitude. Europe and Japan must follow the American example ? It is not certain. The main thing is to know what a pension system should be used for.
If the size and economic capacities of generations were independent of each other, the only justification for pensions would be a form of compassion to overcome the lowest moral hazard which cannot ensure for their old days. The Beveridgian bases of the systems, consisting in setting up a minimal safety net, are based on this idea. However, this justification is well limited to the challenges. The level of fertility and economic performance of a generation depends very largely on previous generations as well as the public policies implemented.
The authors argue that the level of fertility, at an aggregate level, depends on incentives that condition individual behavior. Individual fertility keeps its share of mystery. Cigno and Werding, however, argue that transfers have a considerable impact in total.
We tend too much to observe the low fertility levels, note the authors, as we observe global warming. These would be considerable problems, on which public policies would have little to take. On the contrary, public policies are efficient. However, it is not necessarily in the sense that we think. Clearly, rather that they do not encourage the increase in fertility, public interventions can more effectively limit it, whether it is an explicit aim or an unexpected global effect.
A mixture of liberalism and family
Very liberal, according to French canons, the two authors do not consider the market as the best spontaneous coordination mechanism. If they write that “ public intervention, in all these forms, should remain strictly minimum “, They come back to the major role of the family in the coordination of individual breeding decisions and in the organization of private intergenerational transfers. Very family-friendly in many ways, Cigno and Werding argue that intra-family arrangements can be much more fair and much more effective vectors of redistribution than the market or public policies.
Very incisive, they argue resolutely for the adaptation of the retirement age. As they put everything in sophisticated equations, the problem of the retirement age is treated with mathematical reasoning of the simplest and most clear. If a man has a 78-year-old life expectancy, when she was only 68 for her father, and both of them retire at 63 (we are in the United States), the first will have to be supported and funded for three times more time than his ascendant. Longevity is really a problem only because of the statutory, even compulsory nature, of the retirement age.
The authors leave aside the question of the necessary renewal of generations. This renewal cannot only be legitimized by the objective of financial equilibrium of pension plans. It poses a number of problems in terms of sustainable development. Supporters of the “ decline »Also suggest that you no longer set such a goal. Believers think that you have to grow and prosper. Cigno and Werding do not say a word. Their text, beyond original and fundamental remarks, is a nugget with regard to international comparisons on complicated subjects and around which data is lacking. The interested reader will therefore throw himself with passion on comparisons between different sides of family policy, tax expenditure, the organization of equipment and services. Specialists will delight information and developments on the family retirement benefits and developments. Pension bonuses, pension increases for family load and other family benefits attached to pensions represent a point of GDP In France. These mechanisms are almost inexistent in the United States or Japan. In the eyes of the authors, they have the advantage of linking the structure of pensions to the size of the descendants of a household.
Distinguishing the desirable in terms of reform from the possible Cigno and Werding do not aim for the revolution. They want to revisit the systems. There will always be a safety net system. It then takes two mechanisms, one by contributions sitting on income and another, more original, taking into account the number and the contributory capacities of children. Clearly the two economists call to link the individual pension amount to the number of parents’ children and to the investment (in particular) that they were kind enough to consent for their education.
That to remember from this often unprecedented mass of information and sometimes more conventional analyzes ? The big lesson is that by limiting public retirement systems, fertility could start upwards. This is a very tempting option – even so unrealistic – for governments faced both with the financial pension crisis and the collapse of fertility …