Pensions Past and Present: Same Equation, New Constraints

A notable characteristic of the pension issue is the extreme simplicity of the underlying accounting equation, the one which describes the relationship between three parameters: retirement age, contribution rates and the relative level of pensions. The text published in 1946 by Paul Vincent is by no means obsolete in this respect; the terms he uses to describe this equation could well be found, practically unchanged, in most current publications. The arguments he deploys to rule out a general return to a funded pension system also remain very contemporary. He focuses on a particular form of this system: investments with fixed nominal returns directly exposed to the risk of inflation. Today, the debate would be centred rather on the performance of financial markets, their potential contribution to the financing of the economy, counterbalanced by other forms of risk to which they expose contributors. But what remains approximately true is that no system is independent of demographic constraints: pensions are necessarily drawn from the wealth created at the same time by the working population. This idea was used repeatedly at the height of the debate on funded and pay-as-you-go systems in the 1990s.

Among the three terms of the pay-as-you-go “triangle”, Paul Vincent excludes an increase in contributions, for reasons that are easy to understand. The French economy in 1946 was an economy of shortage, with the priority being to rebuild and to minimize the burden upon working people. While ruling out an increase in contributions, Paul Vincent refuses the option of a downward drift in pensioners’ relative living standards: on the contrary, everything must be done to avoid such an eventuality. He thus argues for the third solution, for him the least unjust, namely an increase in the retirement age. But he suggests that it be combined with a population policy designed to limit its extent, or even make it unnecessary over the long term. This population policy is two-pronged: first, a higher level of fertility whose effects on the size of the working population would restore the pension balance over the long term; and second, over the short term, a targeted migration policy designed to repair the imbalances in the 1946 age structure, i.e. above all, the deficit of births during the First and Second World Wars.

With 70 years of hindsight, how do these recommendations stand the test of time? The most outdated aspect is the author’s presentation of population ageing. The ageing that Paul Vincent diagnoses and fears is almost exclusively “from the bottom”, due to below-replacement fertility. This phenomenon still exists and is an important component of overall ageing in many countries; in these countries, family policies and greater recourse to migration are options that need to be considered. But in the French case, the main problem is not of this nature. France is a country where ageing occurs almost exclusively from the top, due to the lengthening of life. Family and migration policies can only provide temporary solutions to this form of ageing, unless we accept the unrealistic idea of compensating increasing longevity byperpetual population growth. Our contemporary understanding of the effects of the baby boom illustrates this change of approach. There is no doubt that the baby boom temporarily played the positive role that Paul Vincent expected from an upturn in fertility, but all this is now viewed as a long and non-reproducible parenthesis of history, whose closure must now be managed. After helping to finance pensions, baby boomers are now becoming a drain on resources: the large cohorts reaching retirement age account for a large share of the problems to be faced until 2035-2040.

So the demographic situation has become very different. Ageing, associated with an increase in life expectancy, is seen much more positively than in Paul Vincent’s time: the pejorative French term vieillard he uses to qualify the over-60s was abandoned many decades ago and sounds shocking to modern ears. But at the same time, this ageing is much more pronounced and irreversible than that...