Pensions have been at the heart of discussions on social security reform in most European countries. Fundamental questions have been raised and occasionally fundamental reforms have been decided upon and implemented. We should not be surprised by this attention being paid to policy options for pensions as pensions represent a major financial burden, or if one prefers, a major investment for the social security systems of all countries. Moreover, the aging of the population combined with a falling birth rate has distorted the active/passive ratios. The question of whether pensions will continue to be financially sustainable in the future is often raised. The pension issue is also linked to other, broader, policy issues, not least to the issue of whether European countries should allow more immigration .
Of course, in order to answer the question as to whether pensions are financially sustainable, the issues relating to the financing of social security in general should also be addressed. This is, however, not our intention here. Let us merely observe that the financial sustainability of pensions, as is the case for all social security schemes, depends not only upon the cost of the benefits , but also upon the sources from which the schemes are financed. Moreover, not only should the current financing methods be considered, but new ones should also be looked at, especially financing methods not directly related to the income earned from work by the socially insured person. However, as we said, we shall leave these questions for another occasion and concentrate here upon the policy issues directly related to pensions.
We would like to make an analogous remark concerning the immigration issue. This question is much broader and complex than the pension issue. Let me suffice with saying that today immigration is neither the cause of the problems our pension schemes face, nor the solution to the financial problems of our pension schemes. Immigration is not the cause of the financial problems of our social security , and certainly not of our pension schemes. However, even in areas often referred to by people opposing immigration, such as child allowances, the impact of immigration remains very modest. Neither will immigration solve the demographic problem. At best, it will postpone it by several years. It is also clear that the immigration of larger groups of persons coming from a different cultural background will create some problems. These will have to be responded to by increased efforts to explain what social security is about and to integrate the newcomers, especially women of certain groups, into the labor market . Depending upon the success of this integration, pension schemes will either gain or lose out from immigration.
As said, we will concentrate on pensions. By pensions we understand all long-lasting cash transfers or all long-term benefits . These can be related to various social risks : old age and widowhood but also orphanhood and invalidity . We will restrict ourselves hereafter to old age and retirement pensions and pensions for widow s and widowers. These exist in most countries, whereas orphan pensions and invalidity pension s do not exist in many countries as those countries prefer to deal with orphans in their family allowance schemes and/or cover incapacity for work by benefit schemes based on the ambition of returning to work.
We shall hereafter deal with twelve policy issues concerning old age and retirement pensions and/or widow and widowerâs pensions1:
- Old age or retirement : what is the social risk ?
- Who should be covered and how?
- Repartition vs capitalization
- The pension age
- Requirements for a full pension
- Pension and the family unit
- The pension amount
- Working with a pension
- Acquired rights , rights being acquired, and the younger generations
- Why keep widow and widowerâs pensions?
- Should widow and widowerâs pensions also benefit non-married survivors ?
- Which state support for second and third pillar arrangements?
1 Old Age, Retirement : What Is the Social Risk ?
Let us start with the rather strange question: what is the social risk of old age ? First of all, reaching a certain age can hardly be seen as a risk. What is more, it is not even clear which eventuality we aim to cover with our old-age pension s (in a broad sense). The social risk of old age is indeed more difficult to describe than would appear at first sight. By and large, the risk consists of the assumption that it is no longer possible or suitable for a person of a certain age to work in order to make his or her living. Hence social security âs provision of income replacement for people attaining a certain age limit (old-age pension) or for people who terminate their professional activity after having reached a certain age (retirement pension ). We thus basically distinguish between old-age pension s in the strict sense, with respect to which entitlement depends on attaining a specific age, and retirement pensions, with respect to which stopping work is crucial and one is able to stop working from a certain age. Traditionally, old-age pension s in the strict sense are associated with universal schemes and peopleâs pensions, as we know them in Scandinavian countries, the United Kingdom, and the Netherlands, whereas retirement pensions are typical for professionally based social insurance schemes. It is indeed logical that if work does not play a role in being socially insured (but merely residency), then stopping working or not working will not be relevant. Likewise, when you are socially insured because of your work or because of your professional category, then it is logical that ending this work and thus retiring from the active population, opens up pension rights . Yet we establish that this logic often seems to have been abandoned: even in old-age pension schemes in the strict sense, the possibility of cumulating work and pension will sometimes be restricted, and in many retirement schemes the continuation of work after a certain age does not exclude pension entitlement. We will return later to the policy options available for working while receiving a pension. For now, let us suffice in establishing that the traditional choice between an old-age pension in the strict sense, and a retirement pension approach has become somewhat blurred. So in the end we are left with the question of what it is that we are actually covering as a social risk with our pension arrangements.
2 Universal or Professionally Based? Pillars? Compulsory or Not?
Any pension scheme has to make a choice regarding its scope of application and its compulsory character.
Most statutory pension schemes will be compulsory and cover the whole population (so-called peopleâs or national insurance schemes) or cover only the working population, or certain groups of working people. It is obvious that a national insurance scheme will require a certain period of residence before granting an old-age pension , whereas the professionally based social security schemes will determine pension entitlements on the basis of the number of years of participation in the pension arrangement. The disadvantage of a professionally based pension scheme option is obviously that people may change profession and change from one scheme to another during their active life. Moreover, they may simultaneously carry out activities falling under different professional social insurance systems, and the calculation of the pension(s) will then be more complex.
Usually, statutory pension schemes are compulsory , as they require a solidarity system to be operative.
Here we focus mainly on statutory pension schemes. Old age risk is often covered on the basis of the so-called three pillars: the first being a statutory insurance scheme (compulsory or not), the second being participation in pension schemes laid down in a collective arrangement (compulsory or not), and the third being individual private pension arrangements . Obviously, when the first pillar is less developed, the second and third pillars will increase in importance, and vice versa. The conditions and amounts prevailing in the second pillar will sometimes be grafted directly onto those present in the first pillar . Such a situation can pose serious problems for these collective social insurance arrangements should any changes arise in the statutory old-age social insurance scheme. This will be the case, for instance, when the collective arrangement grants its participants full cover for old age (statutory pension + collective arrangement pension) constituting a certain percentage of the most recently earned wage, and when the amounts of the statutory pensions are reduced. However, these arrangements have now been...