What is the right size for pensions? That question can be approached in two ways: “then” and “now”. Pensions, and other economic arrangements to support elderly people, may be considered repayments for what they did back then, when they were young. Alternatively, these payments may be considered as a share of output right now. In rich countries, the two approaches are in conflict. The “then” logic, which is based on promises made long ago, supports higher pension payments than the “now” logic, which is mindful of rapidly ageing populations. Politicians struggle to find acceptable compromises between the two approaches.
Until 60 or 70 years ago, politicians did not have to worry much because governments played a minimal role in supporting the few people who lived long enough to be unable to earn their keep. The elderly mostly relied on their own families for support. Moralists provided a “then” justification for this obligation: children had a duty to the parents who gave life, the young owed the old more than could ever be repaid for the provision of nurture and wisdom.
Philosophers and religious teachers often claimed that the duty of children to parents was as natural as that of parents to their children. However, many people must have remained unpersuaded. Otherwise, the injunction would not have been repeated so often in such solemn tones.
Perhaps the popular desire to shed some of these unwanted personal loads lies behind the last century’s great pension shift – from families to the state. While children in rich countries still often take some care of their elderly parents, direct financial support has become rare. Rather, the old now usually depend on some combination of their own savings, state-regulated private pension plans, income from government retirement plans, and state benefits such as free or heavily discounted medical care. Americans rely more than Europeans on private means, but even in the United States the government has become the predominant source and arbiter of income in old age – and the “then versus now” pension question has become highly political.
The “then” arguments have changed. There is less talk of unquantifiable inter-generation debts and more of the just repayment of past financial contributions. The larger the past contribution, the larger is the correct size of the current pension. Whatever its ethical value, this then-and-now picture of pensions is economically misleading. While individuals who contributed more in the past may be given higher pensions, a whole society cannot really save for old age. Pensions are always “now”, a share of total current income.