It is a universal fact of human experience that the interaction between generations is at once a source of material and spiritual support, social development, and tension (if not conflict). It follows that it is a perennial challenge to minimize the negative potential and maximize the positive potential of this interaction.
Concern over the relationship between young and old spikes from time to time according to the rise and fall of sundry political or cultural crises. That concern is sometimes based on real, significant problems, and sometimes it is based merely on the perception that one or the other side of a generational battle has lost touch or has failed to assimilate the knowledge or habits necessary for the maintenance of advanced civilization.
We are currently in the midst of one of those times of concern, as evidenced by numberless studies, conferences, and commentaries in one way or another relating to the subject of what some have called “intergenerational solidarity.” It is hard to deny, moreover, that contemporary worries about generational strife are well-placed. The confluence of large and not-easily-modified historical forces—an unprecedented burgeoning of elderly populations coupled with shrinking proportions of young people; growing moral toleration for the practice of ending the lives of the disabled, terminally ill, and even the uncomfortably sick or weak; attenuation of the economic link between parents and children as a result of economic, cultural, and political developments—seems to ensure that the issue of generational relations will only increase in importance in coming decades.
In this tenth volume of the Christian Social Thought Series, Oskari Juurikkala focuses on one aspect of the problem outlined above: the urgency of pension reform, especially with respect to state-run pension schemes (in the United States, Social Security). What is extraordinarily valuable and unique about Mr. Juurikkala’s analysis is its keen appreciation of both the economic and the broader social and cultural dimensions of the issue of old-age security.
Mr. Juurikkala’s approach can be viewed on several levels. For those concerned about specific questions of public policy, he offers trenchant analysis of the situation in both developed and less-developed nations and points in the direction of helpful reforms. For those interested in the wider context of the issue, he furnishes a discussion of fertility rates and their connection to the problem of pension unsustainability. Finally, for those who wish to plumb the depths of the issue and who are willing to consider a more radical rethinking of old-age security, he argues provocatively for a return to a family-based social security arrangement.
As the author freely admits, the goal of providing well for all elderly everywhere is an elusive one and various tactics may be tried with various rates of success. Here is a compelling case, however, that, in most places, the methods currently prevalent will likely be less and less effective as the future unfolds. In the interest of fostering the positive side of generational interaction—intergenerational solidarity—the guidance proffered in this short book should be seriously considered.
Pensions, Old Age, and Christian Ethics
Pension systems in the so-called developed world are not faring well. Longer life expectancies, lower labor force participation among older workers, and declining birthrates are all contributing to the unsustainability of many existing schemes, both public and private. Dependency ratios (number of retirees divided by number of workers) have been rising steadily for several decades. Governments have instituted various short-term fixes that help to keep their systems running. However, a long-term reform agenda is needed, as a major funding crisis looms on the horizon particularly for public pay-as-you-go (PAYGO) pension—or social security—systems.
Public pension systems are a major issue for national economies. The Organization for Economic Cooperation and Development (OECD) recently estimated that the German and Italian pension systems would yield budget deficits of around 10 percent by the year 2030. Due to unfunded pension liabilities, the debt-to-gross-domestic-product (GDP) ratio in these countries would go over 100 percent. This raises some serious questions, such as how long severely indebted pension schemes can keep running, or even whether they can continue to exist. If they must be closed down, how will that happen and who will bear the cost?
Opinions differ widely and wildly when it comes to the future of pensions, both public and private. Some even claim that there is no such a thing as a looming pensions crisis. The range of opinion is understandable, because it is difficult to know anything for certain, given the extraordinary length of the relevant time spans. This makes predictions highly sensitive to numerous assumptions—such as total employment rates, educational behavior, economic growth, longevity, and fertility rates—most of which are hard to predict in any case. This uncertainty invites plenty of political quarrels—sometimes fruitful, sometimes less so. From a moral point of view, the sad consequence is that, regardless of what in fact will happen, the elderly are increasingly seen not as a source of stability, wisdom, and experience but as a burden on the rest of the society.
This introductory chapter serves as a foundation for the rest of the book. It considers the relevant principles of Christian moral and social teaching, while the other chapters delve more deeply into the pension problems facing today’s societies. Although pensions are mostly about economics, they are not just about that because they involve, influence, and shape human persons and communities in complex ways. This should always be borne in mind when considering the nitty-gritty of the current pensions challenge.
Christian Principles Related to Old-Age Security and Care
The Human Person
Before investigating the pension problems facing today’s societies, let us briefly consider the relevant principles of Christian moral and social teaching. The center of this teaching is the fact that a person is not merely a material body that lives for a while and then dies. He or she is created as a unity of body and soul, and together these make up the human person. The body is not merely an instrument or carrier of a supposed human person but an essential part of it, and, hence, there are no social or economic issues that do not affect the human person as such.
Questions of social security tend to be framed in purely economic terms. The human person, however, is neither a mere factor of production nor a pleasure or utility machine, as modern economic theory tends to have it. He is the summit of God’s work of creation, a rational and free being, by nature a social being and capable of and called to communion with other men and with God himself—he is made in God’s image and likeness (Gen. 1:26).
After his creation, man rejected God. This we call original sin. However, the mystery of Christ—the eternal Son of God, who took humanity upon himself, became perfect God and perfect man, and suffered for the sake of man’s salvation—reveals and magnifies the special dignity with which man is endowed. Despite his free and willful rejection of his Creator, man is still so deeply loved by God that each human person is worth the redeeming act of Christ.
From these considerations of Christian anthropology flow certain principles, which mark and define a Christian attitude to old-age security and care. First, the core principle of the Christian message is love, or charity. Saint John teaches that, by nature, God is love (1 John 4:8). Throughout the Gospels, Christ’s affection for the sick and the needy is evident. The traditional corporal works of mercy—feeding the hungry, giving drink to the thirsty, clothing the naked, sheltering the homeless—are distinct marks of the solidarity that forms an unmistakable part of Christian ethics.
The first Christians knew all this, and they practiced it. Particularly marked among the first Christians was their solidarity toward orphans and widows. This is, of course, visible already in one of Christ’s last acts before his death on the Cross, namely that of giving his mother to John to look after as his own mother. This act naturally had great doctrinal and religious significance—Catholics and Orthodox believe that it designated the Virgin Mary as the spiritual mother of all Christians—but it also means that Christ was fulfilling the fourth precept of the Decalogue, honoring his earthly mother and ensuring that she would be properly cared for.
In the Mosaic Law, there are detailed prescriptions aimed at protecting widows. Viewed from a purely human point of view, there are goods reasons for being especially concerned about widows. Women tend to be the most vulnerable members of traditional societies with respect to income security. They often outlive their husbands by ten to twenty years, can rarely earn a sufficient living of their own as they grow old, and hence are dependent on their surviving children, as well as members of the extended family.
Family and Procreation
This takes us to the second fundamental aspect of Christian moral teaching: the role of the family. Theologically speaking, marriage and family formation are an original vocation of man and woman, whom God did not wish to be alone (Gen. 2:18). It is the first and the deepest form of communion between persons on earth. Faithful married couples reflect the fidelity of Christ to his bride, the church (Col. 1:18). Through the sacrament of matrimony, a man and a woman become “one flesh” (Gen. 2:24; cf. Matt. 19:5–6), which mirrors the way in which Christians, incorporated into the church through baptism, make up the mystical body of Christ, so that they, too, are one body and individually members of it (cf. 1 Cor. 12:26–27).
A family is, of course, not merely a communion of two persons but often many more besides. Just as the church in the beginning was as small as a mustard seed but would grow and expand throughout the world, so, too, married couples are called to be partakers in the gift of life, participating in an intimate way in the work of creation through their generous openness to new life. Thus, they become co-workers with God, who calls them to “be fruitful and multiply, and fill the earth” (Gen. 1:28).
In the words of Pope John Paul II, the family is a “cradle of life and of love.” The family is the first and vital cell of the society, and this in many ways. Beyond its theological importance, the family has a major economic and sociological function. Families precede and transcend all other forms of social cooperation, including voluntary associations, businesses, and states.
Furthermore, the family is where children first experience and learn virtues, in particular the virtues of faith and love. Parents should be the first and foremost educators of their children. Families are also—especially in more traditional societies—an important economic unit, a form of mutually beneficial cooperation and support, in which children often share in whatever way they can. It is therefore not surprising that the word economy originates in oiko-nomia, which signifies household management.
More directly related to old-age care and security is the fact that the family is the oldest and most widespread form of social security. Within a family, parents look after their children, who in turn will take care of them when they grow older. In this sense, the family is the oldest form of intergenerational solidarity.
In traditional societies, the common family unit is the extended rather than the modern nuclear family. This is seen in the Gospels, namely in the well-known fact that the Hebrew language does not distinguish among brothers, cousins, and other close relatives (cf. Mark 3:32). The extended family arrangement is not an accident of history; instead, there are good economic reasons for it. If the nuclear family were the only form of social insurance, it would be highly exposed to random shocks such as illness, unemployment, or death. Establishing deeper ties among close relatives—and possibly a larger circle of families, as in the case of clans—helps to pool these risks and hence achieve better protection against the calamities of life.
Now, the family is under intense pressure in the contemporary world. Ideally, the state should promote and strengthen families by providing better conditions for them to flourish and develop. Unfortunately, the establishment of modern welfare states has arguably led to an increasing expansion of governmental organs to areas that traditionally belonged to the family. Often, much child rearing is done by the state. Heavy commitments outside of the home (work, school, recreation) minimize or extinguish the time families spend together.
The State and the Principle of Subsidiarity
How all of this relates to pensions will become clear later. At this point, it suffices to say that, as the state tends to take over tasks that previously belonged to the family, it tends to make families and other intermediate social units unimportant, even unnecessary. At a deeper level the state can never replace the family because it cannot become a communion of persons marked by affection and self-giving. Relegating the family to a secondary place in society causes grave social and spiritual harm.
The challenge is how to reestablish the correct relationship between the family and the state. In Catholic Social Teaching (CST), the solution is summed up by the principle of subsidiarity.5 The principle of subsidiarity states that institutions of a higher order (e.g., the government) should respect and support those of a lower order (e.g., families), not seeking to make them superfluous but aiding them as needed. For example, the state and its organs should not usurp the role of families, firms, and voluntary civil-society institutions. It should provide the necessary institutional context, including rule of law and stable political institutions, which help lower-order organizations and associations to develop and flourish through the free initiative of individuals, families, and local communities. When states try to do too much, they tend to suffocate enthusiasm and initiative, and the solutions that they propose do not correspond to the real needs of the society.
There are various forms of nongovernmental cooperation, which the state ought to respect and cultivate. These include families and many looser forms of community in civil society. They also include market institutions, which correspond to the productive and innovative capacity of men. In the marketplace, where the legitimate rights of each should be protected and respected, people are able to cooperate with each other, for the mutual benefit of all, in the realization of their material needs. The proper functioning of free markets requires many institutions, both legal and moral, without which they degenerate into cheating, robbery, and concealed forms of exploitation.
One could say that, in some sense, there is always in principle a positive ethic in free-market transactions. Transactions can only be called free when they rely on honest effort, free cooperation, and the prima facie mutual satisfaction of wants. However, although man is capable of good, he is also capable of evil and of corrupting things that, in themselves, are good. For this reason, there is a range of opinions and attitudes that one can adopt in relation to the market.
Moreover, markets are never omnipotent or an end in themselves. Neither can all human needs be satisfied by market exchanges. Man’s basic need for love and affection is something that can only be fulfilled through charity, the free gift of self. As the famous Beatles song has it, money cannot buy love.
In the end, a Christian attitude to old-age security and care sees the market only as an instrument—and an imperfect instrument at that. The same applies to the state and other public bodies—perhaps even more so. Institutions can make a difference, but they are never enough. One must oppose any tendency to reduce the problem of old-age security to the purely “economic point of view,” which often masks a materialistic concept of man.
A Quick Guide to Pensions and Old-Age Security
The pension problem is a complex interplay of economic, cultural, and sociological variables, of path-dependent policy histories and power struggles between special interest groups. This monograph can only present a quick sketch of some important issues.
Things are also complicated by the fact that social security systems tend to differ drastically from country to country, and each system has its own peculiarities. However, some key variables can be distinguished without much difficulty.
First, there are private and public pension schemes, which provide income security in old age. In the United States, the public pension system is called Social Security (in Europe this term refers to other kinds of welfare provision, excluding pensions). Public schemes come in all sorts of sizes and shapes. Private schemes can vary significantly too, from occupational pension schemes to pension insurance schemes to pure savings schemes.
Public schemes are usually unfunded, which means that the benefits of each retiring generation are paid from the contributions of the generations then at work. Unfunded schemes are essentially mechanisms of intergenerational wealth-distribution, which is why they are commonly known as pay-as-you-go (PAYGO) schemes. PAYGO pension schemes are safe in the sense that there will always be a new generation of taxpayers to pay the bill. However, they are particularly vulnerable to demographic changes such as low fertility rates, which erode the contribution base and force retirement incomes down.
Private schemes are normally fully funded because they consist of savings rather than intergenerational redistribution. One of their advantages is that these schemes normally yield a larger pension given the level of contributions.6 The beneficiaries also have a legal claim on the accumulated funds, whereas in PAYGO schemes retirees must rely on political promises, which cannot be enforced in courts. In this sense, private pension schemes are more reliable than public ones, especially in countries where governments merit no confidence. However, private pension schemes are vulnerable to adverse market shocks such as depressions and bankruptcies. Although pensioners are usually protected and insured against many of these risks, they may find that they have to live off a smaller pension than they expected.
In the economically more advanced countries, two main pension policy alternatives emerged. On the one hand, the “Bismarckian” system, typical of Continental Europe, builds on a sizeable publicly operated PAYGO scheme, which is funded from significant employee contributions and provides generous benefits to retirees (usually starting at some specific age such as 60 or 65). On the other hand, there is the “Beveridge model,” which originated in the United Kingdom and was adopted in the United States, Canada, and Australia, and provides only a basic level of publicly funded retirement income, so that most people also save for retirement through occupational pensions and other private schemes. The latter system usually employs a fair amount of means testing, whereby those with more modest means receive a supplement to the basic pension.
There is also a third important alternative. In the 1980s, Chile chose a radical path at the time: It did away with its basically defunct public PAYGO scheme and replaced it with a compulsory savings scheme. This means that workers no longer pay for the retirement of the current elderly generation, but they must save a specific minimum percentage of their labor income (10 percent in the Chilean example) and invest it with one of the specialized pension fund administration companies. The Chilean system has since then been followed in many other countries in Latin American and Eastern Europe.
In addition to formal pension schemes, there is also another type of system, without which the picture would be utterly incomplete. In many places, especially in the so-called less-developed countries (LDCs), informal old-age security is just as important as, if not more important than, formal pensions. On the one hand, there are informal savings institutions such as the widespread custom of “roscas” (rotating savings and credit associations), which help individuals to accumulate funds and to create a buffer against income risks. On the other hand, there is the oldest and most prevalent pay-as-you-go mechanism in the world: the family. In many countries, family support, coupled with informal savings, constitute the main if not the only source of income security in old age.
The rest of the book is structured as follows. The second chapter investigates the work incentives embedded in existing public pension systems. It criticizes the way in which these systems tend to encourage early retirement—penalizing work and contributing to their own insolvency.
The third chapter looks at families, pensions, and fertility choices. It argues that the design of public PAYGO pensions makes it more expensive to have many children and is one reason for the ongoing decline in birthrates across the world.
The fourth chapter considers old-age security in less-developed countries (LDCs). It shows that formal pension systems have limited relevance and are in any case facing major funding problems. However, there are well-functioning informal institutions such as traditional extended families that help people in old age.
The final chapter furnishes a more detailed analysis of pension reform issues. It does not propose any particular model, for the suitability of any reform depends on the existing system in each country. However, it argues that societies could obtain both more efficient and more humane old-age security by adopting a largely nongovernmental approach.