Abstract
Departing from the two basic historical models of social protection, the Bismarckian or labour model and the Beveridgean or universal model, the author proceeds with analysing two contrasting alternatives for the future design of pension systems: (i) The individual insurance model; (ii) The universal tax-financed model. Although motivated by common drivers—an ageing society and technological revolution—the responses and incentives are substantially (philosophically) different. Ultimately, there is a tension between social rights and financial markets that may end up with the predominance of one over the other. In the current (liberalizing) environment and considering past and recent EU policy guidance on this matter—the timidity of the social-rights centred strategy (contained in the European Pillar of Social Rights) in contrast with the impulse given to the development of the Capital Markets Union—may after all mean the triumph of a financial market-driven approach.
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Notes
- 1.
An expanded taxonomy of social protection models was conceived by Esping-Andersen (1991), to include: i) Social assistance-type models; ii) Insurance-type (or Bismarckian) models; and iii) Universal (or Beveridgean) models. I will restrict the analysis to the two latter models, as prevalent in the developed world.
- 2.
Initially the case with health (1883), accident (1885), and disability and old-age insurances (1889).
- 3.
As explained by Musgrave (1981, pp. 97-98), the transition from funded to PAYGO systems (particularly in the case of the U.S.) was due to two main reasons. Firstly, it seemed unacceptable to exclude the then older generation from benefits, the more so their plight had been accentuated by the Great Depression. Secondly, the 1937 recession, which followed rapidly upon the introduction of the system, rendered a substantial system surplus undesirable on the grounds of stabilization policy.
- 4.
With a vice-versa situation occurring in the opposite scenario.
- 5.
The first pillar—a mandatory publicly managed pillar—would have the limited object of alleviating old age poverty and co-insuring against a multitude of risks, preferably tax-financed (therefore relying on a pay-as-you-go principle). The second pillar—a mandatory privately managed pillar—would link benefits actuarially to costs and carry out income-smoothing or saving functions for all income groups of the population and this would be financed on a fully-funded basis. Finally, the third pillar—a voluntary pillar—would include occupational and personal saving plans, providing additional protection for people who wanted more income and insurance in their old age, and would also be fully-funded (The World Bank 1994, pp. 17–19).
- 6.
Typical market failures in this field are information asymmetry and adverse selection, positive externalities, and consumer myopia and procrastination. To these market failures should be added the inability of private plans to address poverty issues, and to ensure both intra-generational and inter-generational redistribution. Public plans had better (proper) conditions, notably due to government involvement in addressing these problems.
- 7.
See, for a broad picture of pension systems reforms, Modigliani and Muralidhar (2005).
- 8.
Defined as “the ability of pension systems to meet their liabilities in the medium to long term. This can be measured by the long-term actuarial balance of the system. Sustainability implies that the discounted present value of the stream of contributions and other revenues over a long horizon is sufficient to cover projected benefits” (Fall and Bloch 2014, p. 14).
- 9.
Allowing for consumption smoothing over the life-cycle (Fall and Bloch 2014, p. 23).
- 10.
More recently, Fall (2014) investigated the impact of (negative) productivity, migration and longevity shocks on both DB and DC (point) schemes. None of these schemes is exempted from suffering the consequences of these shocks. For example, in the event of a negative productivity shock, unlike DB schemes that enter immediately into deficit, the DC scheme—that is balanced by nature—will project the impact of the shock in future cohorts—these will be entitled to lower pension rights. In fact, the average pension of the DC point scheme will be considerably affected as it decreases in line with the contributions received by the scheme.
- 11.
Schokkaert and Van Parijs (2003, p. 254) entering the debate on the European pension systems’ reform subscribed to Musgrave’s rule qualifying it as an ‘automatic stabilizer’ of the PAYGO system.
- 12.
In this this regard, Pavolini and Seeleib-Kaiser (2016, p. 7) identify three groups of countries in terms of employees’ coverage of occupational pensions: high coverage countries (Sweden and the Netherlands); medium coverage countries (the UK, Germany and Belgium); and low coverage countries (Italy, Spain and Austria).
- 13.
In the OECD Report Pension Markets in Focus (OECD 2018a, p. 5), it is mentioned that in OECD countries “the overall amount of assets has grown every year since the financial crisis (except in 2015) and is well above the 2007 precrisis level. A majority of these assets are held in pension funds (USD 28.5 trillion)”. The two exceptions in this period were Hungary, where average real annual growth rate was −7.5% over the last decade and Portugal, where real growth was −2.4%. In the former case, this outcome was due to the 2011 pension reform, according to which new entrants to the labour market started being enrolled in the public pay-as-you-go system and no longer in a funded pension plan, while members of the previously mandatory funded pension plans were given the choice of keeping their accounts or transferring their assets into the pay-as-you-go system. Most of the participants chose to switch back to the pay-as-you-go system, leading to a large drop in pension assets in 2011. In the latter case, the decline in pension assets can be attributed to the transfer of assets in pension funds of some of the largest banks to the public pension system in 2011 (OECD 2018a, p. 12).
- 14.
Directive (IORP II) was adopted in 2016 (Directive (EU) 2016/2341, of the European Parliament and of the Council, of 14 December 2016), aiming to replace the IORPs I Directive (approved in 2003), and was to be transposed to national legislations by January 2019. The IORPs II Directive sets common standards ensuring the soundness of occupational pensions and better protects pension scheme members and beneficiaries, by means of among others: (i) new governance requirements, (ii) new rules on IORPs’ own risk assessment, (iii) new requirements to use a depositary, and (iv) enhanced powers for supervisors.
- 15.
Indeed, the aggregate funding position of DB plans has deteriorated in most reporting jurisdictions over recent years. This position was lower in 2017 (or the latest year available) than in 2007 (or the first year available) for 9 out of the 15 reporting jurisdictions. The biggest drop in the aggregate funding ratio of DB plans between 2007 and 2017 happened in the Netherlands (difference of 47 percentage points between 2007 and 2017) (OECD 2018a, p. 24).
- 16.
Recall the current low interest rate environment associated with the monetary policy stance that impacts short-term, but also long-term, interest rates.
- 17.
Abbott and Bogenschneider (2017) highlight the main good and bad consequences attached to the Digital (or Automation) Revolution. The good news is that automation increases productivity, which generates value and creates wealth. Moreover, automation will create jobs and replace unskilled jobs with more skilled ones. Finally, “automation may free up capital for investments in new enterprises, result in the creation of new products, or decrease production costs for existing products which may result in lower prices and thus greater consumer demand” (Idem, p. 10). The bad news is that automation can cause unemployment and under-employment. Furthermore, while automation generates wealth, it does so unevenly. Indeed, the gains coming from the increases in productivity may not be distributed fairly amongst groups of individuals. Moreover, automation tends to disproportionately affect lower-wage jobs and less educated workers, causing greater economic inequality. Increasing inequality can jeopardize social cohesion and foster social conflicts (Ibidem, pp. 11–12). For a more recent picture of the impacts of the Digital Revolution on employment and the welfare state, see Neufeind et al. (2018).
- 18.
Esping-Andersen (1991, p. 21) qualifies ‘de-commodifying welfare states’ as those where “citizens can freely, and without potential loss of job, income, or general welfare, opt out of work when they themselves consider it necessary.” In his opinion, “Beveridge-type citizens’ benefit, may, at first glance, appear the most de-commodifying. It offers a basic, equal benefit to all, irrespective of prior earnings, contributions, or performance. It may indeed be a more solidaristic system, but not necessarily de-commodifying, since only rarely have such schemes been able to offer benefits of such a standard that they provide recipients with a genuine option to working” (Idem, pp. 19–20).
- 19.
In particular, as also noted, “automation allows firms to avoid employee and employer wage taxes levied by Federal, state, and local taxing authorities. It also permits firms to claim accelerated tax depreciation on capital costs for automated workers, and it creates a variety of indirect incentives for machine workers” (Abbott and Bogenschneider 2017, p. 5).
- 20.
United Nations.
- 21.
For further information on this, see: https://www.un.org/sustainabledevelopment/development-agenda/
- 22.
In the Action Plan on Financing Sustainable Growth, presented by the European Commission in March 2018, sustainable finance (SF) is defined as “the process of taking due account of environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities. More specifically, environmental considerations refer to climate change mitigation and adaptation, as well as the environment more broadly and related risks (e.g. natural disasters). Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities.”
- 23.
As noted by Schoenmaker (2017, p. 12), by developing the concept of ‘planet environmental boundaries’ “a timely transformation towards an economy based on sustainable production and consumption, including use of renewable energy and reuse of materials, can mitigate these risks to the stability of the Earth system.”
- 24.
Under this new approach, Schoenmaker (2017) confronts the so-called ‘finance as usual’, where T = F (total value equal to financial value) and where only the ‘shareholder value’ matters, with steps towards a new approach for sustainable finance. In the first step (SF 01), associated with a ‘refined shareholder value’, F > S and E (where F is financial value, S is social impact and E is environmental impact). In the second step (SF 02), T = F + S + E and a shift from a simple shareholder value to a ‘stakeholder value’ occurs. Finally, in the last step, associated with a ‘common good value’, S and E > F.
- 25.
On-going regulatory actions take into account climate-related stress testing. In turn, the IORPs II Directive requires IORPs to include ESG issues as part of their governance and risk management.
- 26.
For a broad picture of the CMU, see Lannoo (2015)
- 27.
For information on this, see: https://ec.europa.eu/info/business-economy-euro/banking-and finance/sustainable-finance_en.
- 28.
See, in this regard, the European Commission Study On the Potential of Green Bond Finance for Resource-Efficient Investments. In this study, a green bond is considered “differentiated from a regular bond by its label, which signifies a commitment to exclusively use the funds raised to finance or re-finance ‘green’ projects, assets or business activities” (European Commission 2016, p. 8).
- 29.
The cases of the Netherlands and New Zealand (traditional Beveridgean countries) are illustrative in this matter (see Barr and Diamond 2010, p. 152 and p. 154, respectively). In the former case, a non-contributory pension is paid corresponding to 70% of the net minimum wage payable at age 65. This benefit is awarded on the basis of residence not past contributions, and depends on the number of years of residence in the country. In the latter, where the basis of the system is a non-contributory pension (New Zealand Superannuation) paid from general taxation to all persons over 65 who pass residency test and included in a person’s taxable income. The pension is approx. 70% of the net average wage for a married couple, more per person for singles, and less if one of the couple is under 65.
- 30.
Social contributions designed in many countries as ‘payroll taxes’ (see the case of the U.S.) are based on a principle of equivalence (they are bilateral taxes), giving the beneficiary a legal right to a benefit that presents a link to the amounts paid throughout the entire contributory life. In contrast, ‘general’ taxes solely based on the principle of ability to pay do not present any link with a past tax record (they are unilateral taxes)—ultimately the benefits amount can be chosen by the government according to other criteria than past incomes/wages (recall the examples of the Netherlands and New Zealand). In redistributive programmes, those that pay more during their working life are not necessarily entitled to a higher amount; poor beneficiaries can receive more in relative terms. Therefore, the advantage of the contributory model is that it provides a legal entitlement to a pension and so pensions (and the respective amount) can ultimately be claimed before a judicial court. The same does not happen, in principle, with the tax model. The disadvantage of the contributory model happens on distributional grounds: payroll taxes typically have a regressive nature, because they do not have a relationship with ability to pay, there are no exemptions for low-income earners, there is no allowance for family size, and a flat rate is applied (Musgrave 1981, p. 110). In contrast, taxes allow for redistribution, as they rely on the ability to pay principle, provide for exemptions, and taken into consideration the size of the family and respective expenditures.
- 31.
Examples of earmarked taxes are certain excise or sales taxes (related for example with consumption of alcohol or tobacco), real estate taxes and taxes on high-valued assets (e.g. ‘fortune taxes’), or even specific taxes made to be allocated to certain social benefits and that can have a narrower or a broader tax base (e.g. the French ‘contribution sociale généralisée’).
- 32.
As is, for example, the last wage or an average wage considering a certain period of time.
- 33.
The adjective ‘implicit’ was coined for this non-financial debt aiming at evaluating the long-term sustainability of first pillar PAYGO schemes: it involves an intergenerational accounting perspective, that implies estimating, in a given year, the current value of future taxes that, on average, each individual will have to pay less the current value of future transfers she/he will obtain.
- 34.
See European Commission (2015, p. 12).
- 35.
These criticisms are detailed and addressed by Van Parijs and Vanderborght (2017).
- 36.
Regarding these various proposals, see again Van Parijs and Vanderborght (2017).
- 37.
The immediate question is who is the owner of the Robot? The capital owner? The I.T. expert, the technical engineer with capacity to ‘control and stop’ the device? Who?
- 38.
An interesting technical issue regarding the design of this tax would be the choice of the tax base: Wage? Capital? Or a new tax base? If so, which measure to be used? Marginal or total robot productivity as a determinant measure? Or instead average wages or the wage of the replaced worker as a proxy for the robot wage?
- 39.
The Brexit decision has so far been the most significant political consequence of this ineffective integration, as a majority of people considered that the EU was no longer able to correspond to their prospects regarding well-being and safety (on the causes and consequences of Brexit, see da Costa Cabral et al. 2017).
- 40.
- 41.
- 42.
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da Costa Cabral, N. (2019). Pensions at a Crossroad Between Social Rights and Financial Markets: Which Way to Be Chosen?. In: da Costa Cabral, N., Cunha Rodrigues, N. (eds) The Future of Pension Plans in the EU Internal Market. Financial and Monetary Policy Studies, vol 48. Springer, Cham. https://doi.org/10.1007/978-3-030-29497-7_14
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