Trouble looms over pension crisis

Start with a couple of simple figures. In the late 1940s, when Western countries created ambitious welfare states - public pensions, public health care, and the like - the average life expectancy there averaged in the high 60s. Today, thanks to the very success of those welfare states, people are living to 80 and beyond.

So when public pensions, for example, came into being, the average person spent some 40 or so years in paid employment, and six or seven retired. The way many of the pension systems worked was that working employees paid a small share of their earnings into a fund, that was then used to support retired workers.

Today, a totally different situation obtains. Some people are now spending more years in retirement than in employment. And with people living longer, health-care costs have ballooned. Typically, public health-care schemes in developed countries deliver far more than primary care, and provide a wide range of interventions designed to prolong life. But the unintended consequence of this is that the share of health-care budgets consumed by seniors is well beyond their share of the population.

In countries without public welfare benefits, and especially pension systems, individuals tend to have larger families, on the assumption their children will look after their medical and retirement needs. Once the state assumed this role, fertility declined. Families got smaller. The population grew more slowly. Therefore, the share of the population that is not working - what is known as the dependency ratio - rose.

In short, a relatively smaller working population is having to support a growing, and more demanding, non-working population. By the middle of this century, absent massive immigration to boost the working population, these systems will collapse under their own weight.

Difficult choice

Governing classes, therefore, confront a difficult choice. They must either jack up taxes to cover the cost of all this generosity, or they must reduce their generosity. Of course, nobody likes taxes. And nobody - least of all the elderly, who, after all, have time on their hands and can go vote against politicians who want to cut their benefits - like spending cuts.

Not to worry, clever politicians found a solution: borrowing. During the good years, when interest rates were low and growth rates high, governments could justify their heavy borrowing by saying future growth would pay it off. Besides, that was all for a later day, and a later generation, to worry about. But then came the global financial crisis, when bailouts and stimulus programmes drove borrowing to whole new levels. Now, Western governments confront levels of exposure which make the crisis of the welfare state more imminent.

Government debt

Moreover, they do so at a time when the scale of borrowing has cut into growth rates. Despite the rosy projections of the prognosticators who say the worst is past, there is a strong likelihood that it will be years before the high growth rates of the past return - in no small part, because of the burden of debt. Absent tough decisions, government debt will grow out of control.

Debt markets are already starting to lose faith in the ability of Western governments to cover their future spending. Bond-rating agencies are downgrading governments, and the interest rates they have to pay are rising.

In the age of prosperity and cheap debt, the inequalities of Western societies, which have worsened over the last generation, could be papered over by state programmes. But those programmes were funded merely by shifting the burden into the future. They weren't taxing the rich to feed the poor. They were taxing the young to feed the old. Young workers face rising taxes to support a generosity that benefited an older, more privileged generation.

Greek protests and American tea party revolts are just the beginning of what will be a turbulent time. In the midst of all this, a new progressive politics seems likely to emerge. But with the progressive politics of old so heavily invested in defending the benefits of those in the system, it will struggle to remain relevant. A new populism, troubling to the old left, is emerging.

John Rapley is the Bradlow fellow at the South African Institute of International Affairs. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.