• Choose a category
• All
• Classic-Fiction

By Root 1609 0

for paying them in future). Much of the policy debate has focused on this question of whether or not schemes are “funded” by investments, but this is a bit of a red herring. Whatever the formal financial arrangements, at any moment the amount available to consume has to be split between people who are working and those who are not. Nobody can eat future meat and vegetables, no matter how much money they have. This will alarm anyone who thinks they have a healthy amount in their pension fund, and it should. Financial assets held in a pension fund are claims on returns to economic activity in the future, and those returns will not be high enough unless there are enough people engaged in sufficiently productive economic activity at that time. All that can change is the geographic scope of the resources being claimed by pensioners—a point I return to below.

For several decades now, since the creation of the welfare state as we know it in so many Western countries after the Second World War, people have worked for about forty or forty-five years, and been retired for another ten or, more likely now, twenty or twenty-five years. Partly this is due to unanticipated increases in life expectancy, which stands now at seventy-eight in the United States and eighty in Europe, compared with only sixty-six in 1945. But these generations should also think of themselves as reaping a reward for their efforts in the Second World War and the “golden age” of growth in the following thirty years. For retirement ages will certainly increase from now on. The average OECD ratio of the number of dependants (children and pensioners) per worker will climb from sixty-five per hundred workers in 2005 to eighty-eight per hundred projected for 2050.9 This implies that the number of pensioners will have to fall—retirement ages will have to rise.

Later retirement will not completely remove the burden on the future, however. Despite improving health in middle and old age, people do slow down as they age, and need more medical treatment. And in countries with sharply declining populations—such as Germany, Italy, Japan, or Russia within about two decades, or China just a little later—the figures seem to remove the prospect of retirement altogether. Will we have to return to the prewelfare state era of old people working until they fall irretrievably ill or die? Is the possibility of a pension becoming extinct?

For several decades, many governments have ignored the demographic pressures by letting the level of their debts rise. They have mortgaged their future citizens’ tax payments in order to spend on citizens of the present. A good tactic for winning elections is a bad strategy for sustainability of the state. The Italian government is already in debt by 106 percent of the country’s entire annual GDP (as of 2008), and annual interest payments out of tax revenues are 5.1 percent of GDP. Its population is shrinking now. The financial markets, through whom money is borrowed (taking the savings of Chinese peasants as well as Europeans, and lending the money to the Italian government so it can provide pensions and health care for its elderly), have taken note: the interest rate on Italian government debt is significantly above the U.S. government’s rate for borrowing money. At some point, the game will be up. This point could be quite close. By 2050, a third of the Italian people will be over sixty-five. Italy and Japan are extreme cases in their demographic change, but this is a widespread problem.

The debt implied by future social and pension obligations is, for the most part, not acknowledged by governments, because the consequence, that pensions, health care, and social security need substantial reform, is politically toxic. There are exceptions. David Willetts, a minister in the UK coalition government from 2010, has acknowledged in his book The Pinch: “Our fears about our society and the strains in our economy reflect a breakdown in the balance between the generations.” He predicts a decade of painful adjustment, without creating political hostages to