The staying power of 'old risk' social insurance pre-commitments

As policymakers try new ways to manage 'new' social risks associated with post-industrial social change, against an economic background of intensified global competition, their endeavours to adapt the welfare state to new labour market, family, and gender role realities are severely constrained by the standing social policy commitments inherited from from the past (Pierson, 2001c). Many experts agree that, institutionally, one of the biggest adaptive challenges has its roots in the staying power of male-breadwinner 'old' social insurance, especially in the areas of old age pensions (Esping-Andersen et al., 2002). This problimatique is particularly pressing because of rapid demographic ageing. In combination with fertility below replacement levels, demographic ageing marks a transformative shift in the age profiles of postindustrial European societies with major implications for future welfare provision.

Falling birth rates on the one hand and rising life expectancy on the other have led to a fundamental shift in the demographic structure of European populations. Increased life expectancy is the result of the swift disappearance of infant and childhood mortality and increased and still increasing longevity of older age-groups. Since the 1960s, life expectancy has increased by an average of ten years (see Fig. 3.13). According to Eurostat estimates, by 2050 almost one-third of Europeans will be over 65 years old—compared to one- tenth in the 1960s and one-eighth in 1990 (see Figs. 3.14, 3.15, and 3.16).

Life expectancy. Source

Figure 3.13. Life expectancy. Source: OECD Health Dataset.

Euro area, 15 countries, 1990. Source

Figure 3.14. Euro area, 15 countries, 1990. Source: Eurostat.

EU-27, 2008. Source

Figure 3.15. EU-27, 2008. Source: Eurostat.

Over the next quarter century the number of people over 85 will double. Between 2007 and 2030, the European Union will see its working population decrease by at least 20 million people, while the number of Europeans aged 65 and over will increase by 40 million.

EU-27, projected for 2050. Source

Figure 3.16. EU-27, projected for 2050. Source: Eurostat.

The historical and projected changes in the age structure of the EU population are illustrated in Figs. 3.14 to 3.16. They show the relative cohort size of the working-age population (the size of each age group relative to the total population) for three years: 1990, 2008, and 2050. The increasing life expectancy in combination with the reduced fertility rates are reflected in the flat—eventually upward sloping—population age structure. The effect of the baby-boom generation is reflected in the bulge wandering from the left (young age) to the right (older age). Barely visible in 1970, the movement of the younger baby-boomers into their working years is very apparent in the graph for 1990, when the youngest baby-boomers turned 22. The hump moves to the right between 1990 and 2008, producing an unusual situation in which middle-aged workers outnumber those in both older and younger cohorts. In 2016, the working-age population distribution is expected to approximate to an upward sloping distribution. This demographic upheaval is likely to hamper future growth. The old age dependency ratio is expected to rise steeply over the next three decades. The major concern is the availability of a sufficient working-age population to support an increasingly older population. The proportion of people over 80 years of age who require domestic care will increase substantially, and it is likely that migrant workers will be needed to meet this care demand.

An ageing population conjures up a challenge for public finances. Increased longevity will contribute massively to rising costs for healthcare funding and old age pensions, provisions originally designed for the high-fertility, full (male) employment, and high growth socio-economic context of the Golden Age of post-war welfare state expansion.

Rising life expectancy and declining fertility, together with a trend towards early retirement of baby-boomers, have already put severe strain on pension and health systems. As the population ages the number of gainfully employed is clearly likely to drop, and since employment and labour productivity are most important factors in the generation of products, services, and incomes, demographic ageing poses an important threat to future living standards. A more pessimistic view anticipates lower productivity as the average working age rises, ultimately resulting in severe burdens on pension and health expenditures (Kohli, 2004; Bertola Blau, and Kahn, 2007; Guerzoni and Zuleeg, 2011; Kohli and Arza, 2011). Demographic ageing affects both the revenue and spending sides of the welfare state: it generates less revenue due to a shrinking workforce and higher expenditures for pensions, health, and long-term care. Demographic ageing implies a growing number of older people and a declining contribution of those of working age to the financing of welfare provision, which is captured in the so-called old dependency ratio: the population aged 65 years or older compared to the population aged between 15 and 64 years (see Fig. 3.17) Already the economically active phase has shrunk as a consequence of very low employment participation by the post-55 age cohorts. Over the 1980s and 1990s generous early exit provision was wrongly put to use as a policy lever to mitigate the crises of mass unemployment. According to Eurostat, the average old-age dependency ratio in the EU is likely to grow from 25.9 per cent in 2010 to 50.4 per cent in 2050, with significant variation across Europe (see Fig. 3.17). On average, this suggests that for 2010 there were four people of working age support one pensioner, whereas 40 year later there will be only two people of working age for each person in retirement.

As the baby-boom generation goes on to retirement, an unprecedented number of citizens will claim old age pensions. Population ageing will affect the sustainability of European pension and healthcare systems (Dang, Anto- lin, and Oxley, 2001, see Fig. 3.18). Meier and Werding (2010) estimate that, if pensions systems remain unchanged, under the assumption of constant eligibility requirements, benefit levels, and retirement behaviour, the increase in expenditure on old age pensions, survivor benefits, healthcare, and long-term care will amount to 11.5 per cent of GDP in France, 16.6 per cent in Spain, 18.7 per cent in Austria, and more than 20 per cent in Italy, Germany, and Poland by the year 2020. Productivity and productivity per capita are also expected to decrease because the size of the working population will shrink, and because older workers tend to be less productive. Demographic ageing, moreover, is expected to increase elderly healthcare and long-term care needs substantially, at a time when, as a consequence of family change and especially of the massive entry of women into the labour market, family members will be less able to provide informal care. In the past, care of elderly persons was

Old age dependency ratio. Source

Figure 3.17. Old age dependency ratio. Source: Eurostat.

Old age expenditure. Source

Figure 3.18. Old age expenditure. Source: Eurostat Social Protection.

traditionally the responsibility of extended families and was provided for by non-working women. Future elderly care will most likely be provided through formal, public or private, institutions rather than through individual family members. In a nutshell, the very affordability of European pension and healthcare systems, whether publicly or privately funded, is at stake.

As we know from Paul Pierson, erstwhile popular welfare programmes have, over time, created their own vested interest networks with considerable insider lobbying power, enough to oppose profound social reform (Pierson, 2001c). The majority of current public resources committed to welfare provision continue to be directed at 'old' social risk categories, including unemployment insurance, disability benefits, and, particularly, old age pensions and healthcare. In the future 'silver era' of slower economic and productivity growth, prior extensions of welfare entitlements associated with the post-war industrial era, and the increased fiscal pressure of population ageing, Pierson expects that the staying power of passive social insurance and pension provision could easily crowd out the policy space to counter 'new' risks, such as lone motherhood and labour market exclusion because of institutional inertia (see also Glennerster, 2010). As a consequence, the staying power of 'old risks' engenders lower growth by under-investment in public and private resources that could pay for early childhood care, education and training in order to improve human capital, and productivity and capacities to innovate—factors that could stimulate longterm economic growth and prevent benefit dependency due to lack of skills.

Reforms in pensions and healthcare provision may become increasingly difficult to pursue as older workers and pensioners will, with accelerated ageing, increasingly dominate the electorate. Their demographic advantage could make them well poised successfully to oppose profound reform in pensions and healthcare. As a consequence, new social risks groups will face augmented difficulty in having their voices heard in the political arena. There is, however, little indication that the elderly as pensioners and health consumers have been able to minimize social reform in these provisions in recent years. In Chapter 2, and more elaborately in Chapter 6, I counter the hypothesis that European democracies are being captured by the ageing median voter to block welfare reform. Demographic ageing over the past decade has not stood in the way of fundamental reform, including the freezing of pension entitlements, the raising of the statutory retirement age, the phasing of early exit benefits, the partial privatization of pension provisions, and the strengthening of the minimum income protection function in public pensions. Against the 'new politics' of the welfare state expectation of a clash between the generations, we do observe a recasting of the post-war intergenerational contract, adapted to a changed demography.

 
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