When talking about the future weight of pensions as part of state debt and sustainability issues, commentators often proceed with a flawed methodology. They discount future “liabilities” based, broadly, on the following factors, assumed to be constant:
- pension rights of current pensioners or people who are now becoming pensioners
- population trends (ratio of pensioners to workers, population growth)
This is deeply flawed. There is no reason to think that current pension regimes will remain set in stone forever. Pension “rights” change all the time, indeed if you compare your pension projections based on the state of affairs a couple of years ago with that of today, it’s probably already markedly different, and so for most people in the developed world, and so one can imagine how much it can change on time scales of several decades.
When the entity we’re looking at the liability of is a state, they both pay and make the rules. Sometimes pension rules are enshrined in constitutions which some people say make them unassailable. This is silly: first constitutions can be changed, it just typically takes a broader political consensus to do so, and secondly, it is always possible to work around monetary rules given the flexibility of financial arrangements. If I’m finance minister in a country or region whose constitution says I must pay you 1000 per period as a pension, but I really want to give you 800, I just create a tax or remove a service somewhere else worth 200 that touches you (exactly or by proxy people like you, with a bit of collateral damage) so that you get 1000 nominally but 800 net.
The very idea of pension “rights” is misleading, when projected to the distant future. States make promises they may or may not realise. Politics is about reconciling expectations and reality somewhere in the realm of the possible, and by nature successful politicians tend to be those with ambitions some way ahead of achievable reality. In fact, there’s no such things as formal future pension rights in most jurisdictions, there’s just current rules that apply if you retire now or are currently retired. What you’ll get as a future retiree is similarly open ended as the law is on every over topic (the status of any activity that is currently outlawed, or encouraged by law, may change in the future).
Where this applies is for private entities which are not directly lawmakers (ignoring for a moment that a few large domestic companies with a pension problem could successfully lobby for the law to be changed), but there there is no “problem” to speak of even there. If a private corporation has pension liabilities which become unmanageable with regard to the current size of the business, it goes through a bankruptcy restructuring where incumbent shareholders, and possibly bondholders, are wiped out and the leftovers given to the pensioners, as was done with GM in the US. If there’s not enough leftovers, tough luck, pensioners are just creditors higher up in the pecking order. This sort of liability is not a systemic problem, it just may be unwise to invest in a company with a large legacy pension issue.
The issue is even easier to manage given that the elderly tend to be a compliant lot. Hard to go rioting when you can barely move. So they are unlikely to prove hard negotiators. They merely might end up bitter, if they had expectations above what can be practically realised. And even then, it could be that fancy pension expectations are really a one-off phenomenon that may not survive the passing of the baby boomer generation.
Point (2) is perhaps less controversial, but depends on so many factors that it’s hard to predict reliably, projecting current trends to the future is a gross approximation at best.
A better way to think about pension liabilities is to treat them like any other public service. Every budget cycle, a government raises money from the citizenry (via taxes or seigniorage) and allocates the proceeds to its social programme, e.g. schools, roads, fire engines, etc. Allocating some money to old people is part of this, and the amount old people get will always, ultimately, be the result of political bargaining with the other claimants for a given amount of resources available.
It is not possible for old people’s share to detach from reality. In absolute terms, they can get no more than the entire cake, and practically the slice of the cake they can get is the result of a political process, the intersection of what they want and what other stakeholders will be prepared to give them.
Even if somehow pensioners or pro-pensioners were to take control of politics, and award a disproportionate share of the polity’s resources to pensioners, the society in question would collapse as non-pensioners would have a strong incentive to move away to less taxing places. For instance, if a US federal state was to be markedly more generous than its neighbours with its pensioners and fund it by raising punitive taxes or providing exceptionally poor services on working citizens, they would be very likely to move to neighbouring states to escape this burden, leaving the state with only pensioners. This vicious cycle is obvious enough that the state would have to reverse course long before the last worker has left.
The issue can also be understood by trying to define the limits of states’ liabilities: if we were to accept treating public support for old people as a discounted liability, why don’t we discount everything else the state does and is expected to keep doing in the future? Many people who have young children “expect” state schools to be there until the kids are grown up. People expect roads to be maintained in the future, etc. Basically we could discount more or less the entire public expenditure as a perennial liability. This would make for entertainingly large numbers, but provide no useful insight whatsoever.