EUROPEAN PAPERS ON THE NEW WELFARE

Why the Young Generation Does not Care about the Long-Life Phenomenon — and Ways to Change This

2.2 More Complex Life Cycles

Another reason for the obvious lack of interest by the younger generation in the issues of ageing and long-life soceties are changes in traditional life cycle patterns. Traditionally, the biological life cycle model coincides with the social life cycle model. So education is usually completed during childhood and adolescence, working life is associated with adulthood and retirement with the seniority age.

figure 1: How it used to be: the syncrhronised life cycle
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Now, with the rising of the concepts of life-long learning, active professional life even at retirement age, the concepts of sabbaticals and part time work and a certain tendency towards growing unemployment in some countries, the traditional parallelism between the biological life cycle and the social life cycle is becoming less rigid. Whereas the biological life cycle lengthens, the social life cycle is tending to decompose from its rather standardised traditional pattern and becomes more individualised. Parts of working life are now not only used to generate income but to invest in further education, to bring up children or to bridge gaps caused by job changes. Also, the traditional concept of a regular pension paid throughout the retirement phase might belong to the past, at least for dedicated individuals with good health. Some of them might not want to accept the concept of retirement at all.

figure 2: Future developments: Sample of a decomposed life cycle
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This non-traditional working life pattern is of course nothing bad in itself. It is often even encouraged by state legislation. By the beginning of 2007, Germany has introduced a new child credit system (‘Elterngeld’) that is aimed at encouraging more middle-income couples to have children and at encouraging fathers to take at least two months (or a maximum of one year) off for child care. The programme offers up to 67% of last salary (max. EUR1,800) for a maximum period of 14 months. Similar, though not comparably strong incentives exist to temporarily leave working life to invest time in further education. Moreover, in all Western European social systems there is now a strong tendency to avoid early reirements and to lengthen working life corresponding to the lengthening of the biological life.
In the traditional work cycle, the individual income development is relatively predictable — salaries usually start at a moderate level, increase throughout a professional career and are finally replaced by a moderate pension. As this pattern was forseeable for each individual to a certain extent it was possible to accumulate savings over the working life for the retirement period. In addition, relatively reliable state-controlled risk insurance systems provided a reasonable protection against individual risks like unemployment.

figure 3: A traditional income-spending pattern
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Adapted frome Lee/Manson: What is the Demographic Dividend? finance and Development 2006: 43(3), IMF.

The decomposed, individualised new life cycle model described above does also imply drastic changes in the development of personal income generated from work. In a non-traditional working life, several events can lead to a steep decrease of income from work: time taken off for bringing up children, time taken off for further education as well as an increasing risk of unemployment combined with a decreasing quality and quantity of security provided by state-controlled risk insurance systems.

figure 4: A non-traditional income-spending pattern
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On top of this situation, the average income from work has been stagnating in many Western European countries over the recent decades. In Germany, for example, the average real income from working life has even decreased by 2% from 1991 until today.
The prevalence of non-traditional income-spending patterns gives a strong incentive to the younger generation to accumulate capital for a number of financial risks (like unemployment, raising children with one partner staying at home, further education) that might occur much earlier in the life cycle than retirement. In addition, the chance of a unexpected drop of income that needs to be compensated by own funds early in the working life cycle is today much higher than it was 15 years ago. Consequently, the younger generation has strong incentives to take precautions for these ‘early’ risks and to neglect old age insurance.

3. Inconvenient Truths and Implications

The ‘rush hour of life’ generation is largely indifferent to the phenomenon of ageing societies and demographic change. This indifference must not be confounded with ignorance. The short analysis of the income situation and the individual risks of this generation that has been carried out above clearly shows that other challenges overrule the necessity of taking precautions for their old age and their life in the long-life society.
The younger generation in Western European societies is well aware that there is not much to be expected from state-controlled pension systems, especially when they are based on pay-as-you-go financing. In several countries the ‘rush hour generation’ is facing the double burden of paying the pensions for the elder generation and at the same time being obliged to contribute to a capital-based pension scheme for their own old age.
Under these circumstances, the fund-based, second and third pillar pension systems that are currently offered by banks and insurers and that are usually strongly regulated by the legislator might not fully meet the requirements of the younger generation. Instead of being obliged to accumulate capital for old age only, the younger generation might rather prefer a more general, capital-based ‘risks of life’ insurance. Such a general risk insurance could much better compensate for the decreasing quality and quantity of state controlled welfare systems. It could also much better cover individual risks arising from the shift of life cycle patterns described above.
How could such an insurance work? The insured would contribute to an individual fund which is not limited to being used as a provision for old age only. The range of insured events would be defined on a broader base and would also include investments in further education, time spent off work for taking care of children and might also serve as a start-up financing for one’s own company.
Such a product might meet the the requirements and risk profiles of the young generation much better and could provide a stronger incentive to take long-term precautions for individual risks than the current models do.
The ‘rush hour of life’ generation is facing the consequences of a profound change in the social security systems in Western Europe. Whereas the elder generation can still largely rely on the traditional pay-as-you-go insurance systems and following generations will benefit from the change to fund based insurance models, today‘s younger generation is in a sandwich position between these two systems. It is a considerable challenge to the private and the public sector to provide this generation with a proper set of risk insurance and to help them benefit from the positive effects of the long-life phenomenon, but it can certainly be done.


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