EUROPEAN PAPERS ON THE NEW WELFARE

Financial sustainability of social protection systems (with particular reference to retirement pensions)

On the other hand, experts talk about an extremely large amount of implicit public debt that Governments incur with pensioners and future pensioners amounting to several times a country’s GDP4, which responds to the inheritance that current generations are leaving to their heirs. The European System of National Accounts (SEC-95) records Government operations based on the principle of rights of entitlement; however, within the systems of distribution only recognised pensions and those which have been paid are earmarked annually as expenditure. The implicit debt of the Social Security proceeds from the entitlement rights as a result of the contributions paid but not yet recognised as the person in question has not yet reached the age of retirement. If the principle of rights of entitlement were to be applied to the retirement pension regime, the National Accounts of all the Governments of the EU Member States would incur enormous deficits.
It is unforeseeable that this situation could be tackled by increasing taxation or social contributions given that the competitiveness of each country would suffer enormously. Migration flows are by no means the panacea: young people arriving from other countries are indeed new contributors; however, as a result of family regrouping, this soon entails increases in health and education expenditure and family allowances etc., not to mention the cultural consequences. On the other hand, research carried out in EU member states such as France and Germany, with their long history of migration currents, highlights the fact that emigrants adopt the demographic pattern of the host country from the second generation onwards.
It is, therefore, of utmost importance to attain budget surplus, so that it is possible to reimburse and take off some of the burden of public debt and to enable the creation of reserve funds which will help to cope with the implicit debt of the Social Security systems. With this in mind, the adjustment of the conditions of the Stability Pact by the members of the Monetary Union only worsen the problem. From the 22nd to the 23rd of March, 2005, as a result of strong pressure from the French and German Governments, a watering down of Stability and Growth Pact conditions was approved. In fact, in 2004, both countries had budget deficits amounting to 3.7% of GDP respectively. With the new agreement, the formal aspect of the Pact continues to be maintained, with the criteria of the 3% limit of GDP for budget deficit and 60% of GDP for public borrowing. Nonetheless, from then onwards, the system makes room for ‘other appropriate factors’ when the 3% threshold is marginally surpassed. No specific reference is made to what the permanent factors are and the decision for each case is entirely left to Member States and the institutions. In this way, governments, for strictly political reasons, are postponing the onus of unpopular decisions which they do not wish to resolve at present, for the future- that is to say, leaving the burden for future generations.
As a result of the aforementioned scenario, it is clear that pension system reform and sustainability should be both a political priority and a matter of understanding of the current situation, taking into account the largest possible number of factors at stake.
In order to understand the question of financial sustainability, it is important to consider the distribution system in the following way:
Arp x Nº p = As x Nº w x Sc
where Arp is the average retirement pension, Nº p the number of pensioners, As the average salary for which contributions have been made, Nº w the number of active workers, and Sc the rate of social contributions.
The causes of imbalance within the system respond to the demographic problem — which has been previously mentioned — and its lack of equity. That is to say:
1. The number of pensioners increases at a rate which is greater than the number of workers (∆ Nº p >∆ Nº w). In the cases in which the system has a variable worker replacement rate [Arp/As] variable, a reduction of the average retirement pension (Arp) takes place. On the whole, the regime has a fixed worker replacement rate. Therefore, in order to balance the equation, either social contributions are increased — this measure entails the loss of competitiveness for domestic enterprise and lower employment levels. alternatively, we can resort to public deficit. The Figure 6 shows how the imbalance between the number of retired persons and the number of active persons will grow between 2000 and 2050.
2. When the average retirement pension grows at a higher rate than that of the average salary contribution ( ∆ Arp >∆ As) the same occurs: either the social contribution rate is increased or budget deficit is brought into play.

4 For example, Magnoni d’Intignano, B. (1997), citing sources from the INSEE, estimates that total debt of France is about 2.5-3.75 times its GDP in the mid-nineties; Barea, J. (1999 and 2004) estimates the total for Spain for 1996 of 217% of GDP, of this amount 109% is explicit — which corresponds to the commitment with current pensioners — and 108% implicit — as it refers to the commitment with current contributors. The latter only grows in time (estimates for Spain highlight the fact that they have nearly doubled between 1990 and 1996).
The situation does not differ in the case of the new Member States. According to the Plenipotentiary Office of Poland, the implicit debt of pension could be around 200% of current annual GDP in the latter half of the nineties (OECD, 1998, p.83).


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