David Cosandey
The Failure of Pension Systems
The Self-Imposed Failure of Retirement Systems – A 1-Page Summary
(David Cosandey, La Faillite Coupable des Retraites – comment nos assurances vieillesse font chuter la natalité, L'Harmattan, Collection Questions Contemporaines, Paris, Jan 2004, ISBN 2-7475-5595-X)
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Far from being innocent victims of the falling birth rates, as usually assumed, our retirement systems are in fact the main culprits behind the demographic winter which has been plaguing rich nations for decades. Existing retirement systems have triggered the decline in fertility rates which, in turn has been weakening them, in a vicious circle. In short, our retirement systems are self-destroying.

The Self-Imposed Failure of Retirement Systems presents a historical survey of five nations (France, Germany, Spain, Switzerland and the United States) which demonstrates that stronger pension systems are correlated with falling fertility rates. A country's fertility rate declines each time a pension system is introduced or reinforced – in direct proportion to this fattening. Conversely, fertility goes up as soon as pension systems are made leaner.

How come pension systems have such an influence on birth rates? The short answer is: they are distorted. They do not compensate their affiliates for the real contribution that they brought to their own retirement, the investment in human capital, i.e. the amount they have spent in preparing the next generation. When calculating the pensions, today’s systems entirely ignore the number of kids who were educated or supported by the now-retired persons. They are children-blind. This in spite of their relying upon this next generation to finance the pensions (both in funded and unfunded systems). Through this child-blindness, our current pension systems encourage (unwittingly) a “parasitic” behaviour across whole nations. They encourage citizens to have few or no children during active years, in order to enjoy more money and more free time, and then during retirement get the same pensions ! Non-parents are getting a free lunch in these distorted systems. During old age, they receive the pensions paid by other people’s children. So why having children? Why buying the cow (raising kids), if the milk (the old age pension) is free?

Funded and unfunded systems suffer exactly from the same distorsion and are self-destroying in identical ways. Because stocks and bonds needs buyers to be sold at acceptable prices, a next generation is needed. More generally, whatever wealth was accumulated by the people who are now old, they need young people to serve them. Thus, funded systems won’t be of any help to shield pensions against the demographic crisis. Pension funds have the same antinatalist bias as unfunded systems. They offer non-parents a free lunch, by allowing them to save more, and letting them later live off other people’s kids, who will give value to the accumulated stocks and bonds that the retired people have accumulated…

The Self-Imposed Failure of Retirement Systems debunks the usually put forward “solutions” to the failure of retirement systems (reducing pensions, raising retirement age, large-scale immigration, higher government subsidies, new taxes, shuttering the whole pension system, etc.) The author sketches wholly new, in-depth, solutions. A fundamental reform is needed : pension systems need becoming children-sensitive. Pension calculations have to take into account the contribution of affiliates to their own retirement, that is, they must heed the number of kids raised or supported. In particular, childless people will have to support child-raising people, if they are to receive any old age pension. The fundamental reform that is needed is so new, so mind-boggling, so revolutionary, that it will have to be spread over many years to be accepted and understood by the population at large.

In one country at last, the revolution has already begun, namely in Germany: this nation added in 2002 a child-sensitive component to its pension system (with the Riester reform), thereby showing the rest of the world the way towards a more reasonable, less distorted, and thus more sustainable pensions system.