The second meeting under the theme of ‘Talking about the Human Rights of Older Persons’ took place online on March 2, 2021 with Prof. David Natali at the Institute of Law, Politics and Development, Sant’Anna School of Advanced Studies, Pisa and at Italy’s National School of Administration, Rome. Prof. Natali specializes in the politics of welfare systems in Europe, particularly in the area of pension policy. During the meeting, he talked about what impact rapid population ageing in Europe has had on pension systems, how pension reforms in Europe have evolved, what political and economic factors both at the global and national levels have played part in shaping pension policy in Europe and what challenges European policy makers are currently facing and will face in relation to welfare policy in general and pension policy in particular.
1. Demographic Change and its Long-Term Challenges
Various factors pose serious long-term challenges to pension systems in Europe. One of the key factors, alongside technological innovation, climate change and globalization (migrant inflows), is population ageing. According to EU statistics (2018), life expectancy at birth for males is expected to increase by 7.8 years from 2016 to 2070, that is from 78.3 years to 86.1 years. For females, life expectancy at birth is projected to increase by 6.6 years, from 83.7 years in 2016 to 90.3 years in 2070. By contrast, while employment had been growing, though sluggishly, from the early 2000s to 2020, it is projected that both employment and the working-age population will decline from 2021 onwards. While the fertility rate is assumed to rise from 1.58 to 1.81 in the period of 2016-2070, it would still be less than 2.0 and the ratio of active to inactive population will remain low. As life expectancy increases, it is expected that there will be a surge in age-related public spending, particularly on pensions and long-term care.
2. Pension Policy and Reforms in the Last 30 Years in Europe
To the extent that population ageing and demographic change have been a defining feature of European societies in the last few decades, pension policy reforms have been centered on reducing public spending on pensions by introducing measures such as benefit cutbacks, stringent rules of indexation and an increase in the retirement age. Especially a measure like ‘auto-break’ has ‘automatically’ increased the retirement age in line with a rise in life expectancy – legal retirement age in Italy is currently 67. An effect of this series of measures has been a gradual and less visible decrease in average pension income. This in part explains the relative sustainability of public finance in Europe in spite of rapid population ageing.
3. Contingent and New Challenges
If demographic change is one of the main factors that pose long-term challenges to the sustainability of public finance, the great recession of 2008 caused by the global financial crisis and the COVID-19 pandemic posed contingent and new challenges. In the year 2020, GDP in the 28 member states of the EU fell 12.1 per cent in the second quarter. At the end of the first quarter of 2020, average government debt-to-GDP ratio in the Euro area stood at 86.3 per cent compared to 84.1 per cent in 2019. As of June 2010, the unemployment rate marked 7.1 per cent against 6.3 per cent in June 2019. UN General Secretary Antonio Guterres and UK Prime Minister Boris Johnson even compared the scale of the current crisis and its adverse impact on the economy caused by the COVID-19 pandemic to those experienced during WWII. The current economic downturn has and will put additional burden on public finance: while it has resulted in a decline in tax revenue (payroll tax) and low levels of pension contributions, it has increased the share of the population who have been made redundant and/or are in poverty; in the middle of a serious economic recession, there has been an increasing demand for public spending.
4. Policy Reversal
In the face of these newly added challenges, European countries have shown a partial reversal in their pension policy priorities . If the sustainability of public finance and benefit cutbacks were central to pension policy reforms prior to the great recession and the COVID-19 pandemic, European governments were increasingly compelled to address the issues of an ever-increasing segment of population being in poverty and the inadequacy of pension income. Germany’s pension reform package in 2014, particularly ‘the pensions for mothers’ and Italy’s ‘citizen minimum pension’ can be understood in this context. Germany’s ‘pensions for mothers’ provide extra pensions (by €28.61 per child in western Germany, €26.39 in eastern Germany per month) to both mothers and fathers born before 1992, who cared for children fulltime or had jobs at the same time. Italy, through pension reforms legislated in 2018 and taking effect from April 2019, lowered the retirement age from 67 to 62 (under the condition of 38 years of contributions) and introduced ‘citizen minimum pensions’ under which those on low income are paid a basic income of €780 per month. In addition, ‘citizenship pension as a measure to combat poverty’ provides a basic income to households composed exclusively of persons of 67 years or older, aiming to fight poverty among the elderly. These measures have inevitably increased and will increase the respective countries’ debt-to-GDP ratio and put public finance under strain. For instance, Italy’s debt-to-GDP ratio reached 165 per cent, and France’s is also over 100 per cent. While EU member states are increasingly indebted, it is difficult to cut public spending amidst the current crisis. This highlights the dilemma and difficulties that European policy makers are now facing.
5. Contentious Nature of Pension Reforms and Global Factors
Pension reforms are highly contentious politically, and they are not only shaped by domestic (populist) politics but also influenced by international factors. For example, Italy underwent multiple (around twenty) pension reforms in the last couple of decades, which were heavily influenced by global players. When Italy experienced a currency crisis in 1992, the lira, the Italian currency then, was forced out of the European Exchange Rate Mechanism and in order for it to reenter it, the Italian government had to implement austerity measures, which included pension cutbacks. Similarly, when a debt crisis (‘the spread crisis’) erupted in 2011 under the Mario Monti government, the Italian government had to cutback pensions in return for the European Central Bank’s bailout. These events show that EU policy makers are constrained by ‘external’ factors. The contents of pension reforms are not exclusively at the hands of domestic policy makers and global factors play part in determining the content and timing of pension reforms.
6. New Forms of Poverty in Europe and Debates
As European governments are restrained from further cutting public spending without considering its adverse social consequences, they tend to separate good and bad public spending. Good spending often refers to public investment that has a larger impact on the economy. The European Commission launched an ambitious plan for climate-neutrality by 2050 – an economy with net-zero greenhouse gas emission. This can create the green sectors that generate new job opportunities for older persons and allow them to stay longer in the labour market. However, these post-industrial sectors can accelerate a reduction in the working population and lower wage level, thereby eventually resulting in a reduction in tax revenues, pension contributions and pension income. Furthermore, one of the popular debates that currently take place in the context of Southern Europe is whether monetary (cash) transfer or social services in supporting the vulnerable and older persons are more desirable policies. While the former is believed to be a temporary solution, the latter is seen to have a larger and longer-lasting impact on the economy by contributing to job creation. In fact, social services have increasingly been provided not by governments but by non-profit organizations or/and by public-private partnerships. In fact, Southern Europe has seen new forms of poverty, and international civil society organizations that used to operate in the underdeveloped regions of the world in the 1970s and the 1980s now support the vulnerable and poor in (Southern) Europe.
7 . Towards a Balanced Approach to Welfare and Pension Policy
Deepening polarization and poverty in some parts of Europe, which had been caused and exacerbated by austerity and public finance cutbacks for the last few decades, have brought about a visible shift in the European Central Bank (ECB)’s monetary policy as well as in major European countries’ approaches to welfare policy and public finance. While the ECB initially opted for a rather conservative credit policy in response to the global financial crisis of 2007/8, it softened its stance later on and proactively responded to the COVID-19 pandemic by introducing massive-scale bond-buying programs. This shift can be related to major European countries’ shift away from ‘market fundamentalism’ based on neoliberal orthodoxy. However, arguably neoliberalism has become less popular but we have not yet seen a new paradigm that replaces it. In fact, while European countries have taken on a more balanced approach to welfare spending to the extent that they have moved away from prioritizing single-mindedly the sustainability of public finance even at the expense of other social goals, Europe’s expanded public spending, particularly on pensions, is not intentional but rather a response to the demographic change. Furthermore, there has been an increase in the number of youth in precarious or atypical forms of employment including ‘fake self-employment’. This in fact leads to a loss in tax revenue and lowers pension contributions. This shows the difficult situation that European policy makers find themselves in and this again highlights that there is no easy solution. Welfare and pension reform will continue to be central to political contestation and public debate as population ageing proceeds.
Finally, Prof. Natali expressed a strong interest in sharing research interest and output between the Sant’Anna School of Advanced Studies, Pisa and AGAC in areas of common interest such as ageing, pensions and health care
Hae-Yung Song (manji74@asemgac.org)