The Singular Chancellor
The Merkel Model and Its Limits
Since the outbreak of the European debt crisis, Greek retirees have become a scapegoat for the continent’s financial and political woes. International creditors were infuriated by the lavish Greek pension system, which allowed public employees to retire as early as the age of 50, and demanded radical overhauls in exchange for bailout funds. They got what they asked for; today, pensions in Greece are 50 percent lower than in 2010. As a result, about 45 percent of Greek pensioners receive monthly checks below the official poverty threshold.
Yet the harshness displayed toward Greek retirees is unusual by European standards. The continent’s decision-making process is so heavily tilted in favor of the elderly that pensioners have preserved their privileges even in the face of stagnating growth, crumbling public finances, and skyrocketing youth unemployment. But as the young are pushed to the margins of society, Europe’s gerontocracy is becoming not only financially unsustainable but morally unbearable. Striking a balance between the conflicting interests of the old and the young is therefore necessary to ward off explosive intergenerational tensions.
Pensioners are a nearly unstoppable force in European politics. With a demographic weight of 130 million people—roughly a quarter of the EU population—they can alter the outcome of any election. But their influence is not just a function of their numbers. Retirees are also one of the most politically active groups in Europe.
The Brexit referendum is a case in point. Although the vote was about the future of the United Kingdom, only 36 percent of Britons aged 18 to 24 showed up to the ballot box, as opposed to 83 percent of those over 65. Young people are overwhelmingly pro-European, and if more of them had voted, Britain would not be a departing member of the European Union. (Some millennials are now accusing their parents, not their peers, of having deprived them of a bright future.)
All over Europe, political outcomes show a similar bias toward the preferences of the old. In 2014, German Chancellor Angela Merkel rewarded her seniors with several pension giveaways for having supported her third reelection. British Prime Minister David Cameron promised during his reelection campaign to protect the entitlements of retirees, who, in his own words, “made this [the United Kingdom] the great country it is today.” Italian Prime Minister Matteo Renzi is currently toying with a similar retreat on pension reform, and French President François Hollande has barely attempted to tackle a pension deficit that is set to reach $23 billion in 2020.
Seniors have also been spared from the effects of the financial crisis. In the United Kingdom, for instance, the austerity measures adopted by Cameron’s first cabinet reduced the income of the average household by about $750, while cutting the earnings of the average two-pensioner family by just $36. Even the reforms adopted between 2010 and 2014 mostly affected the entitlements of future pensioners. Italy raised the retirement age, Spain linked future entitlements to life expectancy, and France increased contributions paid by firms and workers. All shielded the pensions of those already retired. This is a familiar pattern for Europe: when unrealistic retirement promises conflict with the reality of an aging continent, politicians shift the burden onto the next generation. In extreme cases such as Italy, retirement benefits are still two to three times higher than contributions would entail. Future pensioners—today’s young—will barely take out what they put in.
The system is vulnerable: it prospers only as long as each generation of workers expects to be at least as well off as the generation of pensioners it pays for.
In addition to political power, pensioners control a disproportionate amount of wealth. European governments spend, on average, 15 percent of their GDP on pensions, but only seven percent on education and family policies. The income of the median European retiree is as high as that of the median active worker, and in some countries is even higher. Finally, pensioners are less likely than the rest of the population to be at risk of poverty or social exclusion. This wasn’t always the case: in the 1960s, Britons aged 65 to 70 were in the bottom 25 percent of the country’s income distribution; now they are in the top 40 percent.
THE RETIREMENT TRILEMMA
Not long ago, young Europeans still dreamed of the same generous benefits enjoyed by their parents. In 2011, French students joined protests against President Nicolas Sarkozy’s proposal to raise the retirement age. But now the mood has changed. Growing uncertainty surrounds the future of the welfare state. Tito Boeri, head of the Italian Social Security Administration, recently stated that Italians born after 1980 will work until the age of 75—15 years longer than today’s workers. And in the worst-case scenario, young generations will pay even more dearly for the mistakes made by their elders. Potential debt obligations due to unfunded pensions range from 70 percent to 360 percent of GDP across Europe.
The intergenerational fault lines exposed by Brexit testify to growing disaffection with this system. Organizations such as the Foundation for the Rights of Future Generations and the Intergenerational Foundation proliferate across the continent. Europe’s pay-as-you-go pension schemes are based on a promise between generations: today’s workers fund their parents’ pensions, while expecting their offspring to fund their own in turn. The system is vulnerable: it prospers only as long as each generation of workers expects to be at least as well off as the generation of pensioners it pays for. But this is no longer the case, and the temptation to stop contributing to a broken financial scheme is mounting. If enough people start questioning the system, it could implode.
To avoid this outcome, European governments should strike a balance between three often incompatible principles: financial sustainability, intergenerational solidarity, and intergenerational fairness. Call it a retirement trilemma.
The principle of financial stability calls for a radical revision of the privileges enjoyed by current pensioners. Benefits should be reduced, and the retirement age should be raised to levels consistent with ongoing increases in life expectancy. This would align Europe’s pension systems with the recommendations of the European Commission and International Monetary Fund, and would be an important step toward sustainability.
As the Greek crisis demonstrated, slashing pensions and postponing retirement may replace financial problems with a social catastrophe. That’s why, according to the principle of intergenerational solidarity, governments should allow for some degree of flexibility. Pensions should not just be proportional to lifetime contributions but should also be adequate to guarantee a decent lifestyle. In order to make the system financially sustainable, governments could levy a solidarity tax on the highest incomes and redistribute the proceeds among the poorest pensioners. Likewise, since even the most skilled workers usually lack the skills to keep up with disruptive technological change, workers hurt by automation should be allowed to retire early if necessary. But in exchange for being removed from a tough job market, they should give something back.
This is linked to the third principle, intergenerational fairness. At a time of stagnating growth and shrinking work forces, idle retirement is something advanced economies can no longer afford. Old people, especially those who retire early, should therefore actively contribute to the well-being of their societies. As long as pensioners are in good health, their benefits should become conditional on work in public institutions. This work should involve the skills acquired throughout retirees’ careers: retired teachers could volunteer in schools; retired doctors could volunteer in hospitals. Lord Richard, the former head of the British Benefits Agency, was criticized for suggesting something similar in 2012, but these active retirement policies would relieve distressed public finances, increase the self-esteem of the old, and make the pension system more acceptable to the young.
Finally, in order for any of these reforms to be possible, it will be necessary to dilute the political power of the older generation. Proposed measures include lowering the voting age to 16, setting the minimum candidacy age at 18, and capping candidacy age at 65. To increase the low turnout rates of young voters, governments should invest in voter education programs through schools and media campaigns. And referenda on nation-defining issues like leaving the European Union should require a supermajority—especially in countries where the elderly represent the majority of the electorate.
Europe needs some fresh thinking to address the economic and political costs associated with its aging population. Governments should opt for solutions that promote cooperation between generations and avoid short-sighted electoral temptations. Only then can they solve the retirement trilemma.