Go forth and multiply - or pay
Adult children have historically been the pensions providers of the elderly, providing their parents with financial support, shelter, or care. In the past, this arrangement gave couples a strong incentive for having children.
Today, as the Swedish economist Gunnar Myrdal predicted, state pay-as-you-go (PAYG) systems have removed this incentive. Pensions are now provided by the government, and although children are still needed to make the system work, the basis of the arrangement has changed. Pension benefits are now tied to work and salary rather than family size.
People without children now receive the same pensions as people who have spent much of their income raising a family. This has created the so-called ‘free rider’ situation, whereby childless couples leave it to others to spend money on raising children who will grow up to be taxed to pay for their retirement.
Now some European countries are considering penalising the childless.
In Germany, debate about reducing the pensions of childless couples has become a hot political topic. Johann Eekhoff, the director of the Cologne Institute for Economic Policy, has said that the state pensions of people without children should be cut by half.
In Portugal, plans to reform of the state pension system included a proposal to raise the pension contributions of childless couples. Contributions would stay unchanged for people with two children, decrease if they had more than two and increase if they had fewer. This proposal has since been dropped.
But are such measures likely to ease the problem of state pensions by encouraging people to have more children? And are they fair in the sense of distributing pensions provision more equitably?
We wanted your views. As ever, opinions from the pension fund managers, administrators and trustees who responded to our questionnaire were varied and lively. Some feel that the proposal to penalise the childless will not work. “This is far too complex an area to be solved just by cutting benefits to one group,” says the manager of one UK pension scheme. Another describes the idea as “a very narrowly focused proposal that ignores the unsustainability of future population growth.”
Some managers feel that the proposal is simply wrong-headed. The manager of a Swiss pension fund remarks that “the problem exists, but the proposed solution is wrong. How can you prove that people have chosen not to have children? A better solution is to favour people willing to have children through fiscal and social facilities. It’s nothing to do with pensions.”
Others suggest that it is the system, rather than people, to blame. The manager of a Swedish pension fund points out that “part of the problem is that people in general will adapt to the systems they live under. To penalise those people is wrong since they have only been thinking of themselves, which is what people do. In my view the fault is the system rather than people.
“Ideas based on belief that the state has a responsibility for pensions financed by taxes are wrong. A hands-off policy would work better since it would encourage individuals to act in self interest rather than a with a social conscience.”
The manager of a multinational pension fund agrees: “State pensions should be awarded to individuals in their own right. If you want to reward those couples who have children then you should instead give them tax credits so that they can save more for retirement rather than discriminate through the state system. How can you reasonably discriminate between the needs of 75 year olds depending on whether they had children 50 years earlier?”
Overall, opinion is evenly divided concerning whether people who choose not have children should receive either a reduced state pension or pay more into their state pension schemes.
A UK pension manager suggests that the proposal would work only of it was introduced at the start of a career. “In theory if you are able to work a full career you should be able to fund your own pension, but this does not give any safety net for those who cannot work, but who happen to be childless.”
However most respondents - two in three - do not agree with the suggestion that people without children should not be admitted to PAYG state pension schemes, since such schemes only work if they are financed by subsequent generations.
Only one in four managers thinks that European governments will be eventually forced to consider awarding people without children lower pensions. And opinion is evenly divided on the fairness of the Portuguese proposal - since dropped - that paid workers with fewer than two children will have to contribute more to their government pensions than those with two children or more.
Significantly, Portuguese respondents are unanimous in their opposition to the proposal. One Portuguese pension fund manager explains why: “Being a working woman I was forced to put my daughter in a private school, so that she could be there during the hours I spend working, otherwise I would have to engage someone to take care of her after school hours. And the government doesn’t help at all.
“In countries like Germany or Sweden, governments have made huge efforts in the past 10 to 15 years to help couples and particularly women to have several children and to be able to raising them and staying home with them for a long time, without losing benefits or their jobs.
“In those cases I can accept that governments feel that they have the right to make state retirement provision depending on the number of children. But that’s not the case in Portugal. My contributions to the social security are nowadays paying for the retirement provision of the elderly and my taxes are no less than those paid by single and childless people.
“Thus I feel entitled to receive back something when I retire within 20 to 25 years and it would be of utmost injustice that my state retirement pension would be penalised due to the fact that I didn’t have more than one child.”
The upside of the Portuguese proposal is that people with more than two children should receive a larger state pension than those with two or fewer children.
There is little support for this, however, with only one in seven respondents in favour. An Austrian pension fund manager suggests that “they should get subsidies to raise children if they are in need”.
It has been suggested that people who choose not to have children should be asked to invest the resources that parents invest in their children in the capital market so as to buy themselves an additional pension, rather than claiming more and more funds from other people’s children.
Opinion is fairly evenly divided on the merits of this suggestion with a slight majority against. One UK pension fund manager points out that “some parents do not ‘invest’ in their children, but are virtually wholly supported by the state.
“Surely the better solution is to pre-fund for all – those with child-free years could contribute at higher levels during those years, which would start the ethos of saving for retirement across the board and reduce the burden on the state.”
It could be argued that it is wrong to penalise the childless by reducing their state pensions because they make a contribution to financing other people’s children through the tax system.
A substantial majority agree with this argument. An Austrian pension fund manager points out that “this is part of the social contract and the social redistribution of wealth which is done via taxes. Let us keep it there.”
Nor is the PAYG system to blame. Some have claimed that an unfunded state pension system provides an incentive not to have children, thus carrying the seeds of its own destruction.
Yet only a minority - one in five - concurs with this. A Swiss manager: “It would be too simplistic to only blame the PAYG system.”
The manager of an Austrian pension fund points out that “people don’t think and decide this way. Having children or not is much more a function of lifestyle, income, and expectations.”
And a UK pension fund manager observes: “I don’t know anyone whose decision to have or not to have children included a moment’s thought about the dependency ratio.”
Perhaps they have other, more important things on their minds.