Liberty News - The Intergenerational Contract is Cracking
Societies are aging at a rapid pace. Pension systems worldwide are under pressure. A rethink is needed. A central adjusting screw is the social reassessment of work, say experts.
The Corona pandemic has led to a decline in life expectancy in many countries; in a few, even a small baby boom could be registered. However, this is only a short-term interruption of the unabated and accelerating trend of societal aging, as indicated by the global old-age dependency ratio: By 2050, it is expected to climb from 15.1% today to 26.3%; in 2019, an increase to «only» 25.3% had been forecast. «The latest data from China, Korea or Italy, for example, point to a further acceleration of demographic change, » says Michaela Grimm, co-author of the 'Allianz Global Pension Report 2023'. And she continues: «Birth rates in particular are developing worse than expected, despite all family policy efforts. But it doesn't help to lament; we have to face the facts: The intergenerational contract has become fragile. The younger generations Y and Z in particular are being called upon to make even greater provision for old age themselves. The uncomfortable truth is that they will have to work longer and save more and in a more focused way.»
The Allianz Global Pension Report analyzes 75 pension systems around the globe using the proprietary 'Allianz Pension Index' (API). The indicator consists of three pillars: Analysis of the demographic and fiscal starting point, determination of the sustainability (e.g. funding and contribution periods) and adequacy (e.g. degree of diffusion and pension level) of the pension system. A total of 40 parameters are considered, with values ranging from 1 (very good) to 7 (very poor). In the weighted sum of all parameters, the evaluation of the respective system crystallizes into an overall score.
Work on the pension construction site is not progressing
The unweighted overall score for all pension systems examined is 3.6: barely satisfactory. Compared with the last report in 2020, this is a small improvement. For the Allianz experts, this is hardly surprising: after Corona, war and the energy crisis, the fiscal leeway of the vast majority of countries had once again narrowed considerably. On the other hand, they find it very disappointing: the need for pension reforms is not in dispute, but the rhetoric is rarely followed by powerful action - the work on the pension construction site is not progressing.
In fact, only a few countries - such as France or China - have managed to significantly improve their scoring through reforms. «France almost exemplifies the political dilemma of such reforms, as they turn the usual political economy on its head: Instead of handing out benefits today in exchange for impositions later, they require impositions today to avoid cuts later,» the experts say. And they go on to say, «The few pension systems that are doing well today, especially Denmark, the Netherlands and Sweden with an overall score well below 3, therefore also have one thing in common: They set the course for sustainability very early, at a time when the demographic bomb was still ticking quietly.» According to the experts, they can therefore serve as a model for many developing countries, which also still have a window of opportunity to stabilize their pension systems. «In many other countries, on the other hand, it will hardly be possible without painful reforms,» they conclude.
Rethinking is necessary
In addition to the technical details, such as contribution levels and periods, there is, according to the Allianz experts, a central adjusting screw for sustainable and appropriate pension systems: the social value of work. According to them, automation, digitalization and artificial intelligence enable universal access to education and thus new concepts of work. «The dissolution of the rigid dichotomy between employment and retirement currently exists only for a privileged few. The pension system of the future starts by rethinking the world of education and work for everyone,» says Ludovic Subran, Chief Economist at Allianz.
Switzerland is in the midfield
With an overall score of 3.1, the Swiss pension system ranks in the upper midfield. However, given the demographic outlook - the old-age dependency ratio will rise to 50.9% by 2050 - there is no room for complacency. In particular, the sustainability of the system needs to be further strengthened. «Higher contributions and, above all, higher retirement ages should not be taboo; after all, Swiss retirees will be able to spend almost 25 years in retirement in the future,» Subran adds.
Swiss pension system continues to face major challenges
«Pension provision in Switzerland continues to face major challenges after the AHV reform. The planned BVG revision is absolutely necessary to strengthen the attractiveness of the pension model and to ensure long-term stability; other countries have made much faster progress,» explains Monika Behr, Head of Life and Member of the Executive Board of Allianz Suisse. The redistribution from working to retired people in particular urgently needs to be stopped in the interests of generational fairness. And she adds: «Together with better consideration of the situation of part-time workers in the BVG, these are key issues that need to be resolved.»