Tuesday, November 07, 2006

Angela Merkel and Social Security

by Edward Hugh

Far be it from me to take sides in the emerging political debate in Germany, but the FT has an article this morning which is very pertinent to the topics we have been recently discussing over here at DM, namely prioritisation of resources between the competing and often conflicting demands of young and old.

The issue is pitched in the FT as being one of labour market reform, but the key point seems to be one of whether to divert resources away from the younger unemployed to the over 50s:

Chancellor Angela Merkel’s Christian Democratic Union on Monday endorsed a proposal to increase unemployment benefits for older jobseekers, offering the most graphic illustration yet of a swing of the political pendulum away from structural reforms in Germany.

The proposal to link jobseekers’ benefits to the amount they contributed to the insurance scheme before losing their jobs is a U-turn from the unpopular labour market and social security reforms launched by Gerhard Schröder, Ms Merkel’s predecessor, in 2003.

As the FT notes this particular initiative from the CDU is unlikely to become government policy,but the mere fact it is being seriously advanced in and of itself raises a lot of issues, and in particular the issue, highlighted in this post here, about the extent to which the state as a provider of social insurance has a responsibility to its clients. But given that the transformation in the age pyramid means that this particular provider is now no longer able to meet its obligations, the big question is who should take the larger share of the inevitable 'haircut'?

The principal danger is that as our populations age our political systems gradually become more sensitive to the needs of the older part of the population, and that in yielding to the demands which understandably will come from this section of society, we cut the lifeline which can make even 'reformed' systems sustainable in the future. The outflow of young people from Germany which was highlighted in this post is but one indication of the looming problem. Politicians will remain deaf to this to the long run cost of all of us.

I would say the principal challenge facing mature democratic societies is the one of 'intergenerational' fairness, or how not to kill the goose which lays the golden eggs whilst honoring your commitments to those who have already paid to the best of your ability.


Anonymous said...

Pension plans always had an implicit assumption that the pool of workers supporting the aged would be relatively large.

If this assumption is wrong -- as in Germany and much of Europe it obviously is -- then the whole concept has to be rexamined.

Increasing the burdens on the young, and hence promoting emigration and hindering family formation -- is an insanely short-sighted approach.

A time must come when the politicians start leveling with the people on what is and is not possible.

Anonymous said...

A agree, Continental pension systems and welfare systems are just too extravagant.

This is one area where the UK has taken a pretty sensible aproach.

Admin said...

"If this assumption is wrong -- as in Germany and much of Europe it obviously is -- then the whole concept has to be rexamined."

I think we all agree about this here at DM nz conservative.

Whether it was extravagant or not in its day is now beside the point, it is unaffordable given the present population dynamics.

The UK has clearly taken some sensible steps in the right direction, but the issue is far from over. The point about the UK situation is that steady inward migration and a the absence of a complete birth bust (France is pretty much in the same situation, although without the reforms, which will come IMHO after the next presidentials - whether it is Sarkozy or Royale) mean that the median age is significantly lower than the worst case examples. So the UK still has 20 years or so to get its act together, and this will be important since during the next 20 years it is going to become all too apparent (unfortunately) just what are the consequences of not acting.

In the US case I would say it is health care rather than pensions which is going to be hard to sustain. The cost of the US health system - both public and private - continues to rise alarmingly.