Fennell Betson reports from the CATO conference on ‘The global public pension crisis’
Most politicians in Germany do not hear the pensions timebomb ticking, Klaus Friedrich of Dresdner Bank in Frankfurt told the Cato/’The Economist conference on ‘The global pensions crisis’ in London last month.Germany had added some 17m potential social welfare beneficiaries, but without corresponding contributions, he pointed out.The current drive by the government was to keep the employer’s contribution rate for social security constant but at the cost of an increase in the value added tax rate. This is not a radical reform of the system.”“
Friedrich said he would like to see more funding of pensions. “”The need to go from PAYG to funding was inescapable.”” He regarded managing the transition as the main problem, acknowledging that this could only be done over time. But he warned that the window for change would ultimately close as it depended on the balance of voters in the population.”“If the population is too old, you will not get the vote to change.””
From Spain, Pedro Schwarz of Fundesco raised the question of whether the Maastricht treaty’s ‘no bail out’ clause would work in practice if a country’s unfunded pension liabilities got out of hand. If there was a New York city style suspension of payments what would happen, he asked. “”Will the non-bail out clause hold? We will see.”“
Referring to Spain’s unfunded pension liabilities, he called these a debt “”we do not confess to”“. This approach was hypocritical. “”We kid ourselves about it.”“
Currently, Spain was in balance on a day-to-day basis, with pensions accounting for 11.5% of GDP and and for 30% of the state budget. But by 2010, he reckoned the public pension deficit would equal to 3% of GDP. He did not regard ageing as the problem, as the age of retirement can be pushed back. The main one in his view was that social security contributions were a tax on employment. “”This payroll tax leads to the black economy. This makes the tax base smaller and leads to an increase in taxes.”” The high level of people claiming incapacity benefit was another problem.
Overall, this led to governments reneging on commitments and reducing their their promises to younger workers. “”The political ethics of this are doubtful.”“Schwarz referred to the proposals put forward forward by the former of the Chilean scheme José Pinera for reform of the Spanish system, which would take those under 45 out of the state retirement provision. There would be the problem of calculating the cost of the debt for the ‘lost generation’, who would be paying for themselves and the generation ahead.
Looking at a number of eastern European countries, Georges de Menil of Foundation pro Democratia,based in Paris and Bucharest, said the government in Romania had opted for a mixed system, as Hungary and Poland had done. The model would combine a refomed PAYG system with a new mandatory private system and a newly regulated voluntary private system. “”The risks inherent in the wholesale construction of new capital market institutions, and the volatility of securities markets in the region, create strong political arguments against a radical shift to an exclusively private, mandatory system.”“
To use shares in state-owned companies slated for privatisation to finance the transition from PAYG to a mixed system with a mandatory, private component is an option being looked at in some countries, he said. “”One approach involves transferring a percentage of stock of companies slated for privatisation to the new mandatory pension funds in exchange for their agreement to fund, in an equal amount, individual accounts for current retires and older workers, who otherwise would not have the opportunity to benefit from the new private system”“. He thought there was justice to making the workers who built the Soviet plans at least partially the beneficiary of their sale.
The proposal would channel part of the proceeds to individual accounts for their benefit. “”It makes current retirees and older workers, who might otherwise resist the reform, its beneficiaries.”“These countries if they got the architecture right could end up with a healthier balance of public and private in the supply of retirement security than their wealthier western neighbours, he said.
A pessimistic outlook for the Italian market was given by a former foreign minister Antonio Martino. He characterised the modern social welfare system as being one where there were “”too few cradles and and not enough graves”“.
Unchanged, the system in Italy would collapse with contribution levels hitting 50% of pay. The system had destroyed jobs in the economy, new jobs had not been created and firms had gone undergound.Italians were realising that they must act for themselves, as they no longer could sure of what benefits they would get from the state.
But he struck a positive note about the new pension schemes. “”We will have our first pension funds soon and they will be successful,”” he said, pointing to Italy’s high saving rates.
France was a very collectivised country, which was trapped in its vision of itself, according to Pascal Salin of the Université de Paris-Dauphine. “”The trade unions had a vested interest in PAYG. They do not want non-political funded pensions. Their power comes from the current system.”“Referring to a myopic vision of the economy, which believed there was just a limited number of jobs in the economy, this led to moves to decrease retirement age.The trade unions were against the new pension funds that the previous government had introduced. “”They believe that pension funds will decrease wages or be a threat to the PAYG.”” The government were only likely to make “”shy moves”” in the direction of funds. The proposed system was complicated, gave no freedom of choice and only provided limited tax exemptions.
“”New pension funds were being set up in Hungary in the run up to the new mandatory private pension scheme which came into operation at the beginning of the year, said Peter Bihari of the Bank of Hungary. Part of eligible workers’ contribution would be into these plans. About 300 voluntary funds are to be operational as well.
“”Something around 1m workers, equal to a quarter of the labour force would be capitalising to the extent of 0.5% of GDP.”“He pointed to the shortcoming that when people switched from PAYG to a private fund, they would create a gap for the government and thus add to the budget deficit.
From a Polish perspective, the change to the pensions system would leave a gap in the old state system that had to be filled, the conference was told by by Marek Belka, a former finance minister in Poland. This could be of the order of 2% per annum for the next 20 years, with a cumulative defit up to 40% of GDP. “”Part may disappear as a result of benefits of pension reform.”” Among the ways of filling this would be to use the privatisation programme.”