'European Pensions & Global Finance
Gordon Clark’s book, European Pensions and Global Finance, provides a refreshing addition to the burgeoning literature on social security and old age retirement security. Rather than offer another solution to the pending crisis, he reviews the political economy and economic geography to examine the role and status of European pension systems in relation to financial imperatives driving globalisation. This book is a unique examination of the history and geography underlying pension systems and demonstrates that certain value systems embedded in countries lend themselves to potentially different solutions from those in the Anglo–American world. In essence, it contrasts the prevailing pay-as-you-go (PAYGO) defined benefit (DB) schemes (social solidarity) with the individual-account defined contribution schemes (DC) (the Anglo–American model).
It is a pity that such a book was not written years earlier, as many reformers assisting developing countries could have benefited from such a discourse to tailor solutions more suited to local environments than adopting a ‘one model fits all’ approach. Professor Clark hopes to stir up a debate and potentially raise controversy through his book, and in all likelihood he will be successful.
The book seeks to make a few crisp points. First, the concept of social solidarity is increasingly at odds with the concept of the nation-state. Second, countries more disposed to the concept of social solidarity (France and Germany) will probably seek solutions to the pending social security crisis that are different from the Anglo– American model, which favours individual risk, ownership and potential inequality. Third, there may exist a certain xenophobia about reforms towards market-based solutions in Paris and Frankfurt given the role of London and, to a lesser degree, New York in providing the solutions that robust pension systems may require. Finally, that the concept of socialisation of risks embedded in pay-as-you-go social security schemes is anathema to the motive forces driving the new economy.
These tensions between continuity versus convergence to a global model in continental Europe are researched in detail and presented in a very articulate manner so the reader is able to follow along quite easily. A detailed review of pension systems in France, Germany and the Netherlands is presented to contrast different outcomes given different histories within a framework of social solidarity. In the debate on social security, few reform proposals have looked to the objectives of reforming nations to ask whether the professed benefits of individual-account DC schemes are adequate to offset the disadvantages vis-à-vis these objectives. This book will clearly put this debate on values and objectives of citizens of a country in determining optimal outcomes at the forefront of social security reform discussions – at the start of the reform debate rather than at the end of it – and this is truly where it belongs.
While Clark’s credentials as a social scientist are extremely strong, some of the discussions on pension finance repeat the mistakes made in the social security reform debates. If the two extreme models (PAYGO DB and individual account DC) are unsuitable for all countries, then they should consider a reform proposal that offers a middle ground – namely, a fully or partially funded DB scheme where each individual’s claim is based on contribution history and where contributions are variable. Research has shown that such a scheme is effectively a mix of PAYGO and full funding and can capture many of the benefits of DB and DC schemes. These schemes can preserve social solidarity while exploiting the benefits of market solutions. For some reason, academic researchers assume that a market-based solution must imply only a DC outcome. Clark’s work on the Dutch employer-sponsored scheme demonstrates that this is not the case.
Moreover, the idea that London could be a threat to other financial centres ignores a few realities. Even if a government-sponsored system invests in the market, one highly recommended suggestion would be to have the assets managed passively to highly structured benchmarks. Such solutions would not require the services of London-based firms, as these can be implemented at low cost with domestic staff or financial firms.
But those distractions aside, this is a wonderful addition to the literature and a recommended read for any student and practitioner of pension reform. Such a study lends itself to further research as the emerging market histories and geographies lend themselves to more colourful conclusions.
Arun Muralidhar is chief executive of FX Concepts in New York