Kristian Niemietz Blog

Published in “Gesundheit!”, January 2008

Life expectancy is rising in Europe, and this is a marvellous development. However, privately, many policy makers throughout Europe may be cursing it as a great peril. France has already witnessed what the Economist called ‘Sarkozy’s Thatcher moment’. For weeks, strikes by railroad and metro unions paralysed the country. The catalyst was Sarkozy’s plan to end so-called ‘special regimes’ enjoyed by public transportation workers. Their beneficiaries can retire 2.5 years earlier than their private sector colleagues, and still enjoy a full pension. Sarkozy has not followed the course of ex-premier Alain Juppé, who had dared to question the special regimes in 1995 and finally had to surrender to massive protests. The plans now discussed will formally require public transportation workers to contribute for as many years as private sector workers. But this will be bought with an extra pay rise in their last working years, and it is the payment in these years which determines the pension level. Hence, the special nature of the regime is simply being switched from the contribution period to the pension calculation base. Business as usual in France.

Italy witnessed similar protests a few years ago, when the Berlusconi government decided to move the country’s extraordinarily low retirement age up to 65 years. The bill that has now been passed is a much watered-down version. Italians will retire at the age of 61, or after 36 working years. To silence criticism, the reform has been ransomed by raising unemployment benefits and the minimum pension. Business as usual in Italy.

Following the grand coalition’s perhaps most unpopular decision, the retirement age in Germany will be raised to 67 between 2012 and 2029. According to a survey by the Zeit newspaper, 82% of the population are against the rise. To divert criticism, subsidies to employers hiring older workers, as well as longer unemployment benefit payments, have already been enacted. Within both coalition parties, voices are becoming louder to tweak the decision further. Business as usual in Germany.

The really newsworthy story does not come from the continent’s established economies, but from a Johnny-come-lately. From 2008 onwards, Romanian workers will be able to transfer a part of their social security contribution to a personal retirement savings account. Implementation of the reform is very cautious. In the first year, the private component will only be 2% of wages, and it will only fully apply to workers under 35. Very gradually the new savings system will be extended in terms of weight and scope. Whether the new model will fully live up to its promises will depend on many crucial details. Will all citizens have the opportunity to contribute regularly? Will the pension funds market be open to competition, so that customers find the product diversity and value for money they require? Will fund managers be able to invest freely and spread risk broadly, so that people’s old age assets are robust in the face of market turbulences? You may take this reform with a pinch of salt, but a train has been set in motion. While the political struggles that plague much of Western Europe are here to stay and will break open again and again, Romania is slowly veering off towards the escape route.

While few people in France, Italy or Germany would consider individual pension savings accounts as an attractive alternative, the traditional defences of Bismarck’s welfare model become ever less convincing. State-run systems, so we are told, are based on social solidarity. Oh, really? Why is it, then, that each group clings to its entitlements at all costs? Private pension accounts, it is further asserted, only benefit the rich. How should poor people raise enough money to save? But in a state-run system, low-income earners still have to pay for their pension entitlements, in the form of social security taxes. Proponents of this position somehow seem to assume that they earn a better return from the state than they would on the capital market. But why should this be the case?

Individual pension savings accounts cannot alter the fact that with a rising life expectancy, people will either have to retire later, pay higher rates, or accept a lower pension. But the way in which this adjustment takes place would be drastically different. The balance of a worker’s retirement account would simply depend on how much money he puts into it (and on how well he chooses the fund manager) – not on the number of train delays or metro line suspensions his union causes. That is why blocking trains would lose any meaning. Neither would it make a difference to the balance whether the money was earned in the private sector, the public sector, or anywhere else. Concepts such as the ‘retirement age’ or the ‘full pension’ would become obsolete. Nobody would be told to work until a certain age, but of course, the earlier somebody retired, the less money would be in his account.

In short, pension savings accounts would separate old-age provision from politics. This is simply because capital assets are tangible, while ‘entitlements’ are not. Strikes, blockades, media campaigns and patronage can change politically determined variables, but they cannot change the rules of arithmetic. That is why savings accounts would make the retirement age what it should be: a personal decision.