The new long-term welfare politics in waiting

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There are winners and losers in most every kind of reform, and fairness and political feasibility are tough issues for policy makers challenged with questions of effective policy design and just redistribution.

Recent successes in the area of climate policy, namely the European Green Deal, illustrate the promise of what is called a ‘just transition’. Here, the short-term costs of lost jobs in dirty energy sectors are compensated for by longer-term returns on investments in clean energies. To ease the conversion, the European Commission offers an intertemporal solution:  a ‘Just Transition Fund’ put into place to help coal regions phase out brown energies, rather than allowing the wholesale destruction of human and social capital.

Can this kind of intertemporal consensus-building—the principle of ‘just transition’—be used for welfare reform, especially in the area of pension provision?

Post-war pension innovation as intertemporal politics par excellence

In fact, ‘just transition’ was the logic behind pension innovation after World War II, and constitutes one of the most successful feats of 20th century social engineering. Essentially, governments obtained political consensus to deduct money from the incomes of the working-age population to fund the pensions of the retired population.

The model allowed short-term costs on employees to be converted into long-term benefits for retirees, in the expectation that current workers would be treated likewise when they reached pension age. Effectively eradicating old-age poverty, this was highly effective from the 1950s to the 1980s, as the working population grew in size and productivity increases were realised through improved education for the baby-boom generation.

Weakening economic and political foundations

Demographic transitions across Europe, starting from the 1980s, jeopardised the sustainability of inclusive pensions long before the onslaught of the global financial crisis. Today, ageing populations dampen employment and productivity, while ‘secular stagnation’ at low real interest rates makes it difficult for large pension funds to guarantee carefree old age.

To close the pensions gap, governments, reasoning from a zero-sum perspective of static efficiency, must either contract higher debt or reform pension parameters: increasing contributions, raising the retirement age, reducing benefits. These strategies, which carry deeply felt consequences, enflame mass protest and put politicians at loggerheads with the citizenry.

Returns to inter-temporal welfare reform

Effective pension reform continues to require an intertemporal horizon, but with an even longer-term perspective that encompasses the entire life course.

There is plenty of evidence that the quality of modern social policy positively affects long-term employment and productivity, and, indirectly, demand. The quality and quantity of current and future employees and taxpayers are central to the financial sustainability of the welfare state. Welfare in a knowledge economy is geared towards maximising just these qualities, which bolsters the sustainability of the welfare state, including of pensions, in ageing societies.

A true intertemporal approach requires a multi-dimensional ambit of policy interventions across the life course, from early child education and care, through lifelong education and training, active labour-market policies and work-life balance arrangements such as paid parental leave, flexible employment relations and work schedules, flexible retirement and long-term care. Human capital building, allocating, and protecting social policies conjure up a ‘life-course multiplier’. The cycle initiates from early investments in children which may translate into better educational attainment and spill over into higher and more productive employment in the medium run. The latter, in turn, implies a larger tax base to sustain overall welfare commitments, such as pensions.

Can it be done? Lessons from Finland and the Netherlands 

While their reforms do not touch the entire life course, Finland and Netherlands can offer some lessons on how a future-oriented, intertemporal approach can be effective.

A first lesson is that reform sequencing matters. There is evidence that governments which have already enacted family and labour market reforms to facilitate life-course transitions find it easier to put pension reform on the political agenda as part of an inclusive, long-term ‘just transition’.  In the 1990s, Finland, in an effort to keep older workers in the workforce, took initiatives to improve the occupational health, work ability and wellbeing of ageing workers. Reaping the fruits of these investments, Finland was able to follow suit in the early 2000s by giving employees the option of earning larger pensions than before, taking gender into consideration. This eventually allowed the government to postpone the age of retirement, thereby reducing the need for increased pension contributions without affecting the wellbeing of its elderly.

The Dutch lesson bears on mustering political consensus behind reform. In 2012, the Dutch government attempted to increase the retirement age from 65 to 67. This deeply divided the Dutch trade unions, and progress on many other welfare reforms stalled. However, subsequent negotiations wrought amendments more favourable to workers, including capacity-building incentives to lengthen working careers. The parties concluded a full pension accord in June 2019.

In both cases, reform success grew out of a productive, future-oriented substantive welfare agenda. The issue of the sustainability of pension commitments was not reduced to an isolated ‘older worker’ policy issue but became part of a more comprehensive reform strategy, touching on the entire life course from early childhood to active ageing and long-term care.

France: a failure in the making?

Seeing the pension predicament in terms of a productive problem to be managed in an inter-temporal fashion, involving all age cohorts, requires a truly inclusive coalition to support a paradigmatic welfare transition.

This brings no cause for optimism for resolving reform opposition in France. From an intertemporal perspective, the government has been unable or unwilling to incorporate investments in children and young families into a broader programme of long-term fiscal sustainability, including pensions.

The French predicament seems bound to result in here-and-now mutual concessions, sure to further undermine younger cohorts’ ability to carry pensions in the future.

A more comprehensive social-investment horizon could have inspired a more inclusive substantive welfare consensus and a stronger pension-reform coalition, thereby isolating the more self-serving unions who simply refuse to consider the long term.

head and shoulders photo of Anton Hemerijck  Anton Hemerijck is Professor of Political Science and Sociology at European University Institute (EUI). He regularly advises the European Commission on welfare policy and social investment.

head and shoulders photo of Robin Huguenot-Noël Robin Huguenot-Noël is advisor on public finances at the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). He wrote several reports on EU investment policy for the EU institutions.  

Anton Hemerijck and Robin Huguenot-Noël recently published the policy report Social Investment Now. Advancing Social Europe through the EU Budget, co-authored with Francesco Corti and David Rinaldi.