Abstract
Pensions and social insurance—key parts of the welfare state—redistribute income and wealth across class by providing, or not providing, practical and legitimate access to basic income without requiring work for pay. Mistaken attention to generational equity and austerity economics creates a set of beliefs that older people should work more, forming what the article calls an emerging “Working Longer Consensus,” which is supported by three false doctrines. Using OECD data and secondary sources, the article counters each false doctrine by showing that healthy longevity gains are not distributed equally; there is no demonstrated trade-off between public spending for the elderly and children; and a greater supply of elder labor does not necessarily mean economic prosperity. The Working Longer Consensus, like the Washington Consensus, promises that pension austerity will yield economic prosperity.
At heart, welfare states determine who has claim to income without working for pay. 1 Programs and systems making up the welfare state in some way or another serve to commodify or decommodify labor. Secure pensions mean workers can claim leisure at the end of their working lives. Similarly, care leave and paid sick leave lay claim to income under certain circumstances. Work-hours laws lay claim to “the weekend.”
The variety of welfare state changes is caused by economic and political differences; 2 this article concentrates on the similarity, not the differences, in a common welfare state reform narrative that is emerging across the OECD. Retirement time—the elderly’s legitimate claim to time free from commoditization—one way or another, is being contested by a new feeling, not supported by evidence, that many problems will be solved if older people work longer. This common sense in support of pension reform, what I call the “Working Longer Consensus,” 3 calls for a variety of proposals and comes in various forms, but the more commonplace reforms are calls for reducing pensions and making older people work more and longer.
The Working Longer Consensus represents a reversal of twentieth-century labor union and progressive efforts to extend the ability to retire with sufficient income after a lifetime of work across socioeconomic classes. A common welfare state tactic to provide equity and security to those who worked in a market economy was to confer, to all persons, paid time off at the end of their working lives.
Envisioning a “utopia” that is realistic and pragmatic was the late sociologist’s Erik Olin Wright’s major intellectual and social project. 4 A key part of Wright’s utopia was a power balance between workers and firms, and I argue here that pensions matter in that balance. Pensions are basic incomes and are key to older workers’ bargaining power. 5
Wright argued that a crucial task when building practical utopias is acknowledging hard limits. This article argues that the utopia of universal retirement for those who want it is inhibited by what people think are hard limits but are not. The evidence supports two propositions: (1) pension generosity does not drain resources from the young; (2) forcing older people to work because they have less secure pensions does not produce more productivity but skews power toward capital and away from labor. The claim made by the Working Longer Consensus—that working longer helps everyone—is untrue. Low-income and marginalized workers are hurt the most by pension cuts because their work and life result in lower-than-average longevity and higher morbidity. The distribution of healthy human life spans after age sixty-five is becoming more unequal because of the nature of American work and the changes in the US pension system.
The Emerging Working Longer Consensus
In July 2020, a Wharton School working paper, the title of which could be a motto for the Working Longer Consensus (“Working Longer Solves (Almost) Everything”), 6 argued for longer work lives because the authors found a correlation between cognition and work past the mid-sixties. The business case for hiring older workers includes the acceptable and common praise that older workers provide lower turnover costs and more experience and the sharper claim that older workers can provide flexible labor at lower costs and more productivity for less pay. In sum, older workers are profitable. The authors add arguments reminiscent of the nineteenth-century case for child labor, 7 that working for pay provides older workers with healthy social interaction. Everyone wins, which is an important part of “consensus thinking.”
In August 2019, the OECD published a call to claw back commitments to the aged to improve economic growth. 8 The publication, “Working Better with Age,” was lionized by an Economist blog post the same year for arguing that “employment of older workers is vital if prosperity is to be maintained.” 9
The working longer policy perspective suggests that the older person is responsible for coping with eroding pensions by working longer. The older person should be a “silver surfer,” one who modernizes her or his skills and learns how to “surf” computer technology. “The over 55s should take it upon themselves to keep up with technological changes. Become a silver surfer. Your livelihood may depend on it.” 10
The Working Longer Consensus, like the neoliberal “Washington Consensus,” 11 has support at polar ends of the political spectrum. Just like the Washington Consensus, the problem and the solution are viewed as apolitical; thus, cutting pensions is the only practical technocratic solution. And again like the Washington Consensus, the Working Longer Consensus suggests that cutting pensions accomplishes broader economic goals of stability and growth. A longer working life is presented as a “free lunch” policy solution. 12 All gains with little cost.
The origins of austerity economics and their modern manifestations are beyond the scope of this article. The argument here is that cutting spending by cutting pensions is part of the agenda that especially helps employers wanting cheap labor, especially as the workforce ages.
A 2019 report by the Melbourne-based Mercer company (a mainstream management consulting firm) reveals parts of the Working Longer Consensus by the questions it asks in its annual survey of national pension systems. 13 Each system is given a grade for its adequacy and sustainability, and Mercer offers policies that would raise their grade. Most recommendations involve cutting pension benefits (by raising the retirement age) to encourage working longer. In theory that would work. In practice raising the retirement age at which full pensions can be collected may cause more elder poverty and poverty among families with elderly members. For example, cutting pension basic income to make older people more desperate to work has been a long-standing policy in the United States and Japan. Yet the Mercer report recommends that the United States and Japan cut further by raising the so-called retirement age—the age when full benefits can be collected.
The United States and Japan have the highest elder poverty rates in the G7 and the OECD. Japan’s elder poverty rate is 19 percent, and the US rate is 21 percent. And elders in those countries have fewer years in retirement than in other G7 nations. The negative relationship between retirement time and poverty is driven by high rates of elder labor force participation, with lower pensions and no commitment to improve labor standards and pay for older workers. The United States and Japan have deficits in both the labor market for older workers and in their pension systems. Notably, older Americans work more and have the highest poverty rates in the G7. (See Table 1.) I discuss retirement time in what follows.
Elder Poverty Rate and Retirement Time in G7 Nations.
Note: The effective retirement age is the age at which half of people have left the labor force.
Source: Rafal Chomik and Edward Whitehouse “Trends in Pension Eligibility Ages and Life Expectancy, 1950–2050,” OECD Social, Employment and Migration Working Paper 105 (Paris: OECD, April 2010), https://doi.org/10.1787/5km68fzhs2q4-en; OECD Data, Poverty Rate (2019), https://data.oecd.org/inequality/poverty-rate.htm.
The Cases of Italy and Japan
The pressure to do something to reduce pensions is especially strong in the rapidly aging societies of Japan and Italy. In these nations, fertility rates are low, longevity is growing, and the economies of both countries are sluggish. The pension promises are not fully funded with private finance assets; their pay-go structures are becoming more expensive to fund because both nations have shrinking tax bases. The tax base used to fund worker pensions is shrinking because of the expanding informal and contingent labor markets and the underperformance of the Japanese and Italian economies.
Consider Italy’s underperforming economy and, therefore, underperforming pension system, which have caused much of the Italy’s political tumult. The Five Star and National Front movements owe much of their popularity to their populist move to reverse the 2011 pension cuts, which took the form of raising the age to collect full retirement benefits to sixty-seven. The neoliberal economists pushed back, arguing that the populist move to reverse raising the retirement age was “overly generous” and “destabilizing [to] public finance.” Eduardo Campanella argued in Project Syndicate in 2018 that instead of the government’s increasing pension benefits, older Italians should work more. 14 Yet this call for more elder work faces a practical problem: the working longer policy is not realistic when the Italian economy cannot fully employ prime-age adults, much less more elders seeking work.
The Japanese situation is similar and the working longer message is also dissonant, because Japanese older workers already work longer than those in any rich nation. The Japanese have the highest effective retirement age in the G7 at 70.8 years of age. 15 Given Japan’s fertility problem and difficulty in financing pensions, the OECD has advised Japanese policymakers to reduce older workers’ wages and ease the protective treatment of older Japanese to make it more profitable for employers to hire them.
It is instructive that the central bank of Japan seemingly does not approve of the plan. In September 2019, Japanese central bank officials argued that Japan’s economy suffers from too many elderly workers in low-productivity, part-time jobs. The Bank of Japan would also resist the Mercer proposal that workers save more to fund their retirements because of its chronic concern that the too high savings rate in Japan chokes demand. And what is the driver for high Japanese savings rates? Answer: inadequate pensions. The high savings rate lowers real interest rates and causes deflation, in turn slowing the economy and making pensions even more inadequate. Reading between the lines of central bank language we find nudges toward expanding pensions for elderly Japanese retirees and improving their jobs. 16 It is not surprising that a kernel of dissonance to the Working Longer Consensus would appear in Japan—in the form of some questioning that more work and fewer pensions are the solution to old-age poverty—when poverty and labor force participation rates among the elderly are so high. There are no such discussions in the United States.
Working Longer Consensus Origins in the United States
I trace the seeds of the Working Longer Consensus in the United States and its American roots to the Reagan administration. Malcolm Lovell, Ronald Reagan’s deputy labor secretary, was prophetic. 17 He warned the US Congress in 1982 that eroding workplace pensions and cuts in Social Security would mean that the elderly would have no choice except work for pay. Although his intention was charitable, the effect was to shape social insurance policies to commodify elder labor. He advocated passing aggressive laws against age discrimination and eliminating mandatory retirement, and Congress complied. In 2000, Congress passed the Freedom to Work Act, which penalized retirement before age seventy. The United States still stands apart from the European Union and OECD by banning mandatory retirement and by making the age to collect full benefits the advanced age of seventy. Congress offered generous terms for delaying claiming Social Security—a guaranteed 6.75 percent per year for every year past age sixty-two. But fewer than 10 percent of workers in the United States wait until seventy. 18 Few researchers and policymakers realize that most workers over the age of sixty-two collect Social Security while they are still working.
The fascinating political history of mandatory retirement in the United States is that ending it was never a demand of workers or workers’ organizations. 19 The legal scholar Julie C. Suk argues that antidiscrimination law promotes workers’ choice in the United States, whereas in Europe ending mandatory retirement was important to providing flexibility in labor markets. 20 Economists and policy experts, not workers’ advocates, pushed for the end of mandatory retirement. The interplay of mandatory retirement laws and pension generosity is a ripe area for further research.
The debate that we cannot afford pensions toggles back and forth between what is fair for children and what is affordable with various techniques and measurements, numbers that are without economic meaning but pack a big political punch. Two of those measures are worker-to-nonworker ratios and Julia Lynch’s age-weighted welfare states. 21
The Working Longer Consensus Reverses the Growing Equity in Retirement Time
The increase in average longevity does not mean, from a technical or economic standpoint, that people should work longer. Just because the dependency ratio, the ratio of workers to retirees and children, is decreasing so that more workers support nonworkers does not mean that societies face an iron law of a “proper” worker to nonworker ratio. A productive society can afford many items of a good life, including healthy retirement.
Working longer policies are political choices. A difficulty in paying for pensions is that they are becoming more expensive as the global population ages because of general improvements. Lower fertility rates, advancements in health care, and extension of baseline sanitation and clean water technologies add to global population aging. And advances in average longevity do not logically mean that more elderly should work. In fact, in the United States they have meant the opposite: since the end of World War II, well-distributed longevity gains have been accompanied by the decreasing labor force participation of children and older men.
In 1950, life expectancy at age sixty-five was equal for black and white men—about 12.8 years. Now there is a two-year difference. 22 In the last twenty years, all longevity gains for Americans have gone to those in the upper half of the income distribution, and almost all the gains in retirement wealth have gone to the top 20 percent.
Older women at the bottom end of educational attainment can expect almost sixteen years of retirement time, but more than a third of that time will be spent with significant health impairment. 23 The most highly educated women have a life expectancy of nineteen years at age sixty-five, a fifth of those years with impairment. Older men have a less pronounced class pattern. Lower socioeconomic status men at age sixty-five have about 12.6 years of retirement time, with 27 percent of those years spent in impaired health. Like the highly educated women, high-SES men can expect almost two more years of life with a little less time—20 percent—impaired.
Making American workers work more is especially harsh given that American men and women work more hours per day, more days per year, and more years per lifetime than any others in the G7. On average, the American and Japanese get twenty years of retirement time; the French get twenty-eight years; the Italians, twenty-five years; and the Canadians, twenty-three years.
Most policies that advocate working longer give lip service to providing an off-ramp for blue-collar workers, who may not be physically able to work after age sixty-seven or so. 24 The off-ramps are constructed as some sort of disability policy, which most nations already have. Access to retirement benefits is tied to workability, not deservingness. And the argument for a special blue-collar off-ramp is usually couched as concerns for equity, as making sure those with shorter healthy lifespans can retire. 25
Historically, US policies encouraging older people to work longer have contributed to retirement wealth inequality. For example, generous bonuses are made available to those who can delay claiming their Social Security benefits by relying on other income or savings. Benefits increase by a whopping guaranteed 6.75–8 percent for every year a worker delays collecting from age sixty-two to age seventy. But few can delay, and most elderly workers claim Social Security benefits while working to supplement their pay. 26 It is thus largely the privileged who delay and reap the system’s generous rate of return. The educated, who delay entering the labor market after prolonged schooling and have high-paying jobs in old age, also tend to enjoy positions in which they can control the pace and content of their work, allowing them to extend their working lives even further. By contrast, working in old age erodes the health and well-being of those of lower socioeconomic status. 27
Moreover, older workers who enjoy a high socioeconomic status are more likely to enjoy their jobs and would not suffer significant loss in income if they chose not to work. Retirement time (or the time between withdrawal from the labor force and death) varies considerably by nation and by class. American men retire at sixty-five and expect to die 19.9 years after retiring. As mentioned above, in France, the difference between expected death and expected retirement age is almost 42 percent higher, or eight years longer, than in the United States. Note that the United States has the highest elder poverty rate and the second-highest retirement age; working longer does not make elders better off. 28
Americans and the Japanese have the lowest average retirement time in the G7: the difference between expected age of death for sixty-five-year-olds and expected retirement age is 19.9 years in the United States and 19.7 in Japan, compared to French elders’ expectation of 27.5 years, Italians’ 25.4 years, and Canadians’ 22.8 years (see Table 1). The OECD report’s call to work longer is distorted in the United States and Japan because the elderly are already working longer. In the United States most new jobs (6.4 million out of 11.0 million) created in the next ten years will be filled by workers over fifty-five; most will be low-paid and taken by older people without pensions who are forced back into the labor force.
Each nation’s welfare is a combination of taxes and transfer programs. With regard to old-age income security, the United States relies on a voluntary, tax-favored, system of supplements to the mandatory state pension system, Social Security. 29 The voluntary system has never covered most of the workforce, and the tax favoritism is tilted toward the top. The United States relies on a “hidden welfare state” of tax expenditures—revenue not collected because of favored treatment in the tax code—to a greater extent than other nations. That is why the poverty rate in the United States before transfers is only 57 percent, whereas in France (which does not rely on accumulated private assets) it is a whopping 84 percent. The generosity of the American public transfer program is low relative to France, so the difference in the poverty rate after taxes and transfers is large between the two countries: in the United States the after-tax poverty rate is almost one out of four, 23 percent, while in France only 4 percent of elders are living below the relative poverty line. Taxes and transfers increase income for the elderly and reduce poverty rates; the effect varies, however, across OECD countries. The impact of taxes and transfers on poverty depends on the size, mix, and progressivity of each component.
France, Italy, and Germany have the highest poverty rates before tax and transfer—78 percent to 84 percent. The United States, Japan, and the United Kingdom tolerate the highest levels of after-tax and transfer poverty—between 15 and 23 percent. The Netherlands and Denmark have a system of elder income support and a mix of advance-funded and tax-funded income sources (like the United States, but more comprehensive and generous), and that system achieves the same low rates of after-tax and transfer poverty as France, 3–4 percent (see Table 2).
Poverty Rates (for Ages Sixty-Five and Over) before and after Taxes and Transfers in the G7 and the Netherlands and Denmark.
Source: OECD Income Distribution Database (OECD.Stat 2020), https://stats.oecd.org/index.aspx?queryid=66598.
As always, averages hide class and racial differences. In the United States, increases in retirement time have gone disproportionately to the well-off. Longevity gains have also gone to those in the upper half of the population; pension insecurity disproportionately affects the middle and lower-income groups. Thus, the middle- and lower-income groups have lost retirement time while the rich have gained greater control over their time because they are able to choose between good jobs and retirement. Women in the lowest third of socioeconomic status can expect 15.9 years of retirement time, 35 percent of those years in impaired health, with adverse consequences for one or more activities of daily living (ADLs); those in the highest third can expect nineteen years, 20 percent in impaired health. Men follow the same pattern, but with less pronounced class bias. Men in the lowest third of socioeconomic status can expect just 12.6 years of retirement time, 27 percent of those years in impaired health (with effects on one or more ADLs); while those in the highest third can expect 14.3 years with 20 percent impaired. See Table 3.
Retirement Time and Time Spent Sick, by Socioeconomic Class.
Source: Teresa Ghilarducci and Anthony Webb, “The Distribution of Time in Retirement: Evidence from the Health and Retirement Survey,” Work, Aging & Retirement 4, no. 3 (2018): 251–61.
Although professional workers generally control the pace and content of their work and have more command over when they stop working, most workers nevertheless leave their jobs before they plan to because of layoffs and health problems. There is no evidence that employers have made jobs more attractive, better paid, or easier to do for older people. For instance, US policy seems race and class neutral, but, in fact, increasing the Social Security full retirement age (FRA) in 1983 has adversely affected all workers because an increase is equivalent to an across-the-board cut in benefits. Raising the FRA leaves workers with two bad choices: working longer or living on reduced monthly benefits for the rest of their lives. Forcing African American and low-wage workers to work longer further penalizes them because they are less likely to live long enough to recoup payments forgone as a result of delayed claiming. 30
The Working Longer Consensus Wrongly Implies Spending on the Old Reduces Spending on Children
Julia Lynch’s Age in the Welfare State is a highly referenced quantitative study that provides a ratio of social spending on the elderly compared to social spending on children. 31 Her straightforward statistic allows us to compare nations through a specific lens, that is, to compare welfare states for the “age-weighted” social spending in each of them. The lens implies a theory of the welfare state. Lynch collected data for twenty OECD countries between 1985 and 2000 to compute the elderly/nonelderly spending ratio (ENSR) with direct expenditures for programs serving people over age sixty-five in the numerator and the expenditures on programs for people below age sixty-five in the denominator. It is as simple and straightforward a measure as gross domestic product (GDP), and, like GDP, it does not reveal distributional information, such as inequality by socioeconomic group or class.
Lynch’s ENSR for Japan is 42.3. It is 38.5 for the United States and 28.9 for Italy, while Germany is at 16 and Denmark at 5.75. In the forty years between 1960 and 2000, eleven states had rising ENSRs while eight experienced falling ones. Scholars have discussed for the last fifteen years what causes variation in level and trend, but I know of no scholar who has critiqued the relevance of the index. For example, the index has been improved by noting that increases in the high costs of a privatized health care system do not proportionately benefit the elderly; that the United States spends many times more for a knee replacement than Germany does not capture generosity. Since the book was published, the index “elderly/nonelderly spending” has been used to imply a trade-off between young and old. But the generosity to each vulnerable group is a better measure of the effects of a welfare state as also how the welfare state metes out benefits and determines the balance of power between classes. I do not detect evidence that the relative spending for each group is correlated with overall financial security for the old and young.
For example, using Julia B. Isaacs’s improved computations of Lynch’s index (Isaacs considers US education spending), the old/young spending ratios for the G7 has Spain with the highest ratio at 34.7 and a terribly high child poverty rate of 22 percent. 32 The Spanish case would suggest that relatively high spending on the elderly may deprive children, but correlation is not causation and suggestions are not frameworks. The suggestion that spending on the old raises child poverty rates does not hold up well for the rest of the G7: France has the same relative child poverty rate as the United Kingdom and a much lower elder poverty rate, but its elderly/young spending ratio is almost five times greater. It seems that relatively higher spending on the old reduces poverty rates for the old (see Table 4).
G7 Relative Poverty Rates for Children and the Elderly Compared to Public Spending on the Elderly and Children.
Source: OECD, “Poverty Rate (Indicator)” (OECD 2020), https://doi.org/10.1787/0fe1315d-en; Julia B. Isaacs, “How Much Do We Spend on Children and the Elderly?” (Washington, DC: Brookings Institution, 2009), https://www.brookings.edu/wp-content/uploads/2016/07/1_how_much_isaacs.pdf.
There is much scholarly work refining Lynch’s age-weighted social spending ratio, but I believe that it may not be a fruitful area of new research. Measuring social spending on the elderly and comparing it to spending on programs directly benefiting children presumes intergenerational conflict while it organizes thinking about and the evaluation of social policy in terms of age, not class. For instance, spending for programs aimed at the elderly affects the whole family. In the United States, the generous tax breaks for retirement plans that go to the wealthy greatly benefit their children, while the well-being of low-income children depends on their grandparents’ and parents’ Social Security or disability benefits. 33
There is no conclusive evidence in support of Samuel Preston’s concern that spending on children declined in response to increases in both elderly populations and expenditures on the elderly: “The old do not eat the young.” 34 I see little evidence, in the United States or internationally, that the elderly benefit when spending for programs directed at children and working families is diminished. There is considerable evidence to the contrary: in nations where efforts are aimed at reducing child poverty, there often also are political coalitions that strive to reduce old-age poverty.
In the United States, and in other nations, old-age programs greatly benefit the young. US children receive Social Security benefits directly and indirectly by living in households that rely on old-age benefits. Grandparent care and benefits lower poverty rates among both children and the elderly. About 6.1 million children under age eighteen (8 percent of all US children) lived in families that received income from Social Security in 2017, where income lifted 1 million children out of poverty. 35 In comparison, far fewer children, 2.26 million, received payments from the Temporary Aid for Needy Families (TANF) program.
Social Security pays survivors insurance benefits for child dependents of Social Security beneficiaries, and the program has paid $21 billion to children. In contrast, the program for low-income working families, the Earned Income Tax Credit, paid out $58 billion. Programs aimed toward the old are not targeted at poor or low-income families or children, but since disability and early death are more common among lower income groups, these old-age social insurance programs spill over to help low-income children. 36 These spillovers are not calculated in Lynch-type ENSR ratios.
Among rich nations, there is a strong positive correlation between pension and education spending. Wealthy nations that spend a high percentage of GDP on education also spend a large share on pensions. My previous research shows that over a span of forty years, among fifty-eight nations, those with high spending (GDP share per capita) on children also spend more on older women. 37 Evidence from sixty-three nations shows that spending for both young and old populations increased together from the 1990s to early 2000. My statistical analysis showed that a 10 percent increase in spending on education is correlated with a 7.3 percent increase in spending on pensions.
Melina Moe and I made some updates to examine the relationship between education and pension generosity, each a proxy for the government’s generosity toward the young and the old. Education generosity is measured by the percent of GDP spent on education per person under age eighteen; similarly, pension generosity is the percent of GDP spent on pensions per person over age sixty-five. Although we found a tight positive correlation, two-way correlations may be indicative of either a profound connection or one that is merely spurious.
Among the G7, Canada has the highest spending per child on education and has among the highest rates of spending per the elderly (see Table 5). The United States is the lowest in both. Aging populations may also mean that in those nations, the aged have political power. 38
G7 Nations Ranked by Education Generosity Compared to Pension Generosity, Population of Young to Old Ratios, Years Men and Women Spend in Retirement, and GDP Per Capita.
Note: Education generosity is author’s calculation with Melina Moe of the share of GDP spent on education divided by the number of young people (per 10,000 people). Pension generosity is the share of GDP spent on old-age pensions divided by the number of young people (per 10,000 people).
Source: Numerous OECD publications on pension and education spending, filled in by several government sources and available on request.
Because two-way correlations do not establish causal relations, we isolated the effect of pension generosity on education generosity by controlling for the wealth of the nation and for its age profile, measured by the ratio of the young population as a percentage of the old population (results available upon request). Pension generosity and average years spent in retirement are not related, which is surprising: the years of retirement time that men and women have in a nation do not affect pension expenses per person. This suggests that raising the retirement age may not have a large budgetary impact.
As nations become richer, the ability to retire becomes increasingly desired and demanded by unions and accepted by society as a legitimate social expectation. At the same time, and as a consequence, economic prosperity and growth mean that populations age (the ratio of young to old falls) and pension spending per GDP, by definition, increases, unless political forces require that the aging cohorts pay for their numbers if pension spending per old person falls faster than the population ages. Pension generosity (increased pension spending per capita) may increase either because the old are getting politically stronger—a dominant explanation in much of the social literature (see, e.g., Eugene Steuerle’s careful and forceful book) 39 — causing an active trade-off in social welfare policy in favor of the old at the expense of the young. Alternatively, the correlation between pension spending and population aging is spurious, and pension generosity increases are merely connected to the wealth of a nation. The only way to help untangle the causation is controlling for the age of the population, the number of years in retirement, and pension spending as a percentage of GDP per old person—all proxies for pension generosity.
I find evidence for the hypothesis that pension and education generosity trend together that indicates a political consensus for spending on households with nonworking members—a relatively higher share of GDP spent on each child would be correlated with larger shares of GDP spent on pension income.
An ordinary least squares (OLS) regression shows that when the pension generosity per older person increases by 10 percent, education generosity increases by 0.70 percent in 2005 and 0.53 percent in 2015. The relationship is positive controlling for GDP, the age of the population, and the years of retirement. However, the average years spent in retirement do have a small but significant negative relationship with the generosity of education spending per child; nevertheless, overall pension generosity has a strong positive relationship, implying that pension and education spending go together. See Table 6.
Effect of Pension Spending on Education Spending (OLS Regression).
Note: Two regressions were run on each year’s data using different variables. Dependent variable = education generosity. Standard errors in parentheses.
Source: The methodology for the regression is in Teresa Ghilarducci, “The Future of Retirement in Aging Societies,” International Review of Applied Economics 24, no. 3 (2010): 319–31, and Teresa Ghilarducci, “The Old Do Not Eat the Young,” policy paper (Washington, DC: New America, June 17, 2010), https://www.newamerica.org/economic-growth/policy-papers/the-old-do-not-eat-the-young/. The data come from the OECD and several government sources and are available on request.
= significant at the .01 level.
= significant at the .05 level.
My findings that pension and education generosity increase together is supported by other findings that show a positive relationship in intergenerational spending. The economist Axel Börsch-Supan examined sixteen countries and concluded that a nation’s generosity toward the elderly (measured by social expenditures for programs targeting the elderly) does not reduce the share of total social expenditures for programs targeting youth. 40
A 2004 study by the economist Antoine Bommier and colleagues compares US education spending to Social Security and Medicare spending for various age groups and finds that young people have higher returns on their taxes than the older cohorts. 41 The economist Lawrence Thompson of the Urban Institute measured intergenerational transfers by comparing projected wages to projected pension benefits. 42 He found that 2030 wages (after social insurance contributions) would be 35 percent higher than in 2003, while the average retirement benefit in 2030 would be only 18 percent higher than the same benefit in 2003. Families, after education and Social Security taxes are accounted for, transfer over $27,000 on average to younger generations. This means that, in the United States, workers will have a greater increase in living standards than retirees and that the old are not benefiting at the expense of the young.
On the other side, arguing that there are trade-offs between spending for the young and for the old, we find economists such as Robert Novy-Marx and Joshua Rauh and, to some extent, Eugene Steuerle, 43 who argue that pensions—and pension underfunding—put a higher burden on future taxpayers. Novy-Marx and Rauh’s argument is worth exploring (Rauh served as President Trump’s chief economist at the Council of Economic Advisers). Their analysis is not a causal model; they explain the variation in pension funding by state or locality—in other words, the source of underfunding is not explored.
The causation could be exactly the reverse: spending for education could cause states not to fund pensions. That is the case in New Jersey. Instead of raising taxes to pay for the large education expenditures caused by the standardization of spending across poor and rich school districts, the state of New Jersey chose to not fund their state’s pension plans to the level necessary to maintain healthy funding. 44
Furthermore, the redistribution of pension and education spending between classes among the young and old has not taken into account the fact that the future taxpayers who will be tapped to pay pensions are the children who were educated and who benefited from the tax breaks when they were young. The economist Hayat Kahn suggests that although pensions may reduce spending on the young, the young will receive inheritances; the author, however, is silent on class distributional effects, which are likely to be regressive. 45
My results line up with those of the political scientists John Williamson and Fred Pampel. They use a “social democratic perspective” viewing generous pensions and Social Security policy as “the outcome of a struggle between organizations and political parties representing the interests of capital and those representing the interests of labor.” 46 Instead of seeing government spending on the old and the young as constituting a fixed share of GDP, where one crowds the other, spending on both old and young is the consequence of politics. When the political will exists to help vulnerable people and broad support for investment in children is high, spending for both the old and the young increases. This relationship of education spending increasing together with pension spending is explained by political alliances that, once in place, pressure government to spend more on both social insurance and education.
When pension systems are relatively new, middle-aged workers benefit the most because their lifetime financial contributions to the new program are small relative to the value of the benefits they will collect. The logical consequence of this math is that as the programs themselves age, younger workers contribute longer to the system, and the benefit-to-contribution ratio is smaller relative to the lucky first group. But that does not mean that the system is unfair to younger generations.
In sum, the evidence supports solidarity among generations. The grim specter that strong-armed generational politics force young workers to pay high taxes to support the leisure of healthy older people is not supported by the evidence. Pension and education spending go together. Political support for social spending promotes spending for all generations. The evidence supports the existence of intergenerational solidarity in some political dynamics: workers support preserving pensions because they will get old, and they support transfers to workers, young and old. In this way, we can we think of class solidarity as younger workers forming alliances with their older selves.
The Working Longer Consensus Reduces Labor’s Bargaining Power
The beliefs that people want to keep on working, that work is good for people, and that pensions are not fair to the young are forceful, widespread, and influential—and a key element of the Working Longer Consensus.
Who benefits from these beliefs? Employers clearly benefit from the perspective of shortening retirement, from reduced employer contributions and from a larger pool of older workers who have weak bargaining power and are forced to accept wages on employer terms. It is therefore unsurprising that employers are the biggest champions of the new “working retirement” norm. 47 An increase in the supply of labor invariably redistributes income away from wages and toward profits because the pressure employers face for wage increases is defused. In general, an expanding labor supply helps employers to tame the pressures to pay more, improve working conditions, or invest in labor to increase worker productivity.
The two recessions especially affected boomers turning sixty-five, the first wave in 2009 and the middle boomers in the COVID-19 recession. 48 The economist Richard Johnson of the Urban Institute and Peter Gosselin show that the 2008 recession was worse for older American men than any previous recession; in particular, workers over fifty had to wait longer than younger people to get rehired. 49 The COVID-19 recession is having the same disproportionate effect on older workers; for the first time, the unemployment rates for older workers exceed those for middle-age workers. 50
Over the last thirty years, we have witnessed doomsday for middle-class retirees and older workers. The drop in pensions causes a drop in older workers’ reservation wage—the lowest wage a person will accept to enter the labor market. 51 The vast majority of the 10,000 baby boomers turning sixty-five every day do not have enough income to maintain their standard of living so they will turn to work—any kind of work. Almost half of middle-class workers over fifty will be poor or near-poor retirees in 2030. 52 The sheer size of the boomer cohort coupled with their insecure pensions means that 6.4 million of the 11.4 million jobs expected to be added to the US economy by 2026 will be filled by workers over fifty-five. 53
The dynamic between the size of the cohort and the inadequate pensions means that the quality and balance of power in the American labor market depend on what is happening and will happen to older workers. Bargaining power shifts to employers when millions of older adults who do not have enough retirement income to meet basic needs are forced to enter the labor market. The lack of retirement readiness of older workers will not only shape employment patterns for elders but also affect the strength of bargaining power of all American workers, old and young.
There are already signs that older workers are losing bargaining power. 54 Since 1991 older men’s wages started to fall dramatically relative to younger workers and they have lagged ever since. From 1990 to 2019, real median weekly earnings for full-time male workers with a bachelor’s degree decreased by 2.9 percent but increased 8.7 percent for prime-age male workers (thirty-five to fifty-four) with bachelor’s degrees. Older women’s wages have increased slightly, but because of the persistent gender gap, they still have not caught up with men’s. Older workers experienced almost no real wage growth since 2007, despite record low unemployment rates. In the first quarter of 2019, median real weekly earnings of full-time workers ages fifty-five to sixty-four were only 0.8 percent higher than in the first quarter of 2007, the peak of the business cycle. In contrast, weekly earnings for prime-age workers ages thirty-five to fifty-four grew 4.7 percent. In prior business cycles, older workers’ earnings grew at similar or greater rates than the wages of prime-age workers. Those who continue working will be less likely to find good-quality jobs than before. 55
Older workers are increasingly employed in low-wage traditional jobs and in alternative work arrangements. The Bureau of Labor Statistics projects that the fastest-growing occupations between 2016 and 2026 will be personal and home health care aides (1.3 million jobs added). Three-quarters of these new jobs will go to women over age fifty-five—older women taking care of even older women. Just 7 percent of personal and home health care aides are union members, and 24 percent earn less than $15 per hour. 56
Further Research Needed on Why Nations Privatize Pensions
The Working Longer Consensus becomes most persuasive when we consider the standout nations that have both the oldest populations and the most generous early pensions and therefore some of the lowest elderly labor force participation rates. For instance, 18 percent of Italian men between ages fifty-five and sixty-four work, compared to 51 percent of older American and 48 percent of older German men. There may be a meaningful positive relationship between the relative size and thus political clout of older people—measured, crudely, by the share of the population over sixty-five (see Table 4)—and the generosity of pensions. However, Japan has the oldest population and only middling generosity. Italy, in contrast, has one of the oldest populations— 29.8 percent of the population are over sixty-five—and the second-highest levels of pension generosity among the forty-two nations in the OECD from data available. 57
What drives what? In other words, do nations with high unemployment expand pension benefits? Or do generous pension benefits drive people to retire? The Harvard economists Jonathan Gruber and David Wise emphasize the latter, the supply side: older workers decrease work effort when pensions are generous. 58 One should find that people spend more time in retirement when pensions are generous, but perhaps another force is stronger. Nations with high and chronically unemployed populations could be adopting more generous retirement provisions as people leave the labor market at early ages because of low aggregate demand for their workers. Exploring this basic idea, which contrasts with Gruber and Wise’s, 59 involves examining the strength of the relationship between pension generosity and the average time a person spends in retirement. A weak relationship may suggest that people are drawn into retirement for a number of reasons, and one may be that unemployment rates are high. Untangling the determinants of generous pensions and time in retirement are beyond the scope of this article but may be a fruitful area for further research.
Vision for a Fully Funded, Stable Welfare State
A well-functioning and sustainable pension system provides pensions to high-income, middle-class, and low-income workers alike. Including disabled and low-income workers with high-income workers helps stabilize such programs in political terms. A pension system funded entirely from general revenues is not stable and equitable: depending entirely on pay-as-you-go systems to fund a pension system could be foolhardy. Variations in demographic ratios and the productivity of unlucky workers who are in cohorts that experience an unlucky share of severe recessions can make pay-as-you-go systems unstable and unsustainable, because, through no fault of their own, the unlucky cohort’s payroll tax rates could double to pay for existing pensions.
Acknowledging the political instability of a pay-as-you-go system does not mean that such a system cannot work on an economic basis. There is no economic reason why a system funded from general revenue could not work. Paying for pensions is taking resources from current consumption for later consumption. 60 That can be done through government promises, through private arrangements that depend on returns from private bonds and stocks, through a mixed public and private system, or, as the pension economist Nicholas Barr noted, by burying things you will need in old age—drugs, canned goods, adult diapers—in the garden. 61 But, politically, how pensions are arranged matters. 62 For example, in 2020, if Social Security was funded from general revenue, tax rates would have to double to over 30 percent of pay as a small cohort pays for a big one. 63 The required rate may fall or spike year to year. Politically negotiating those allocations each year is not feasible. The two-tier models—a layer of pay-as-you-go beneath a layer of advance-funded pensions—is the most stable model of funding for old age.
The instability in pay-as-you-go rates—which can place erratic burdens on younger workers to fund retirement for a rapidly growing elderly population—is one reason that no nation funds retirement solely from a pay-as-you-go system. Greece tried to do so in the post–World War II period and failed. More recently, Spain did the same, and its system is failing as well.
Best Practices in Other Nations
Models that mix a government-run, pay-as-you-go element with an advance-funded program for accumulation, investment, and annuitization have seen more success. These hybrid systems—for example in the Netherlands, Israel, Australia, and Denmark—are best in class for retirement security and sustainable design. The Mercer report mentioned above (which grades pension systems) uses three criteria I find reasonable: (1) adequacy of benefits to prevent poverty and maintain workers’ preretirement standard of living; (2) sustainability—the funding mechanism is such that pensions do not take too much (subjective) of the nation’s GDP and do not create surprises and instability; and (3) integrity, where the accounting is transparent and there are few conflicts of interest. 64
What makes the Netherlands, for example, get high ratings from the Mercer report? The hybrid public-private nature of the system gives it flexibility to adjust both benefits and revenue to keep the system fiscally balanced and benefits adequate. The adjustments are baked into the rules, the adjustments are transparent, and a centralized administration and oversight keep the system relatively free of corruption. The Dutch system is based on a first layer of public pensions funded by tax revenue and a second tier of near universal, advance-funded occupational pensions or plans for self-employed people, with the ability to lower benefits slightly if revenues from investments fall significantly. Pensions can be reduced if the system does not receive enough returns—this will be a challenge in 2021 because the recession has kept interest rates quite low. 65 But employers, workers, and the government share the risk of financial underperformance, the vulnerable are protected, and the system is highly regulated.
A Better Pension System for the United States
My vision constructs a politically sustainable, adequate pension system with fewer opportunities for financial predation, confusion, and self-dealing. I advocate a fully funded system of universal pensions. I call these universal, public, pension plan options Guaranteed Retirement Accounts. 66 The GRA supplements Social Security with advance-funded pensions, like the Dutch pension. GRAs would be paid for by employee and employer contributions. Workers would be completely or partly subsidized by a tax credit, and these credits would be paid for by eliminating tax breaks for higher-income earners. Depending on the size of the tax credit and on how much of the tax deductions is kept for existing 401(k) plans, the net cost to the US Treasury could be zero and still raise everyone above twice the poverty line in old age.
Second, unlike Social Security, income from the GRA accounts relies on the actual balances in each person’s individually owned retirement savings account. Also, people could add more to the accounts to get an even higher benefit. The GRA plans are like pensions and accounts, arrangements where individuals have some influence on the size of eventual benefits. For instance, in the case of union plans, unions and workers negotiate for lower pay to get more pensions. In 401(k)-type plans workers can vary their contributions to get higher benefits in retirement. Also, GRAs have the advantage that their balances are better managed than individually directed commercial accounts. When real capital is pooled in large GRA accounts, highly regulated plan managers—as they do for big pension plans, endowments, and the like—would choose a portfolio of long- and medium-term high-performing investments that yield a much higher risk-adjusted rate of return than the current system of 401(k) plans and IRAs, which are exclusively in short-term liquid assets. Getting a higher return for a dollar of savings would help close the retirement wealth gap without adding costs for anyone. Everyone can have the advantage of returns from a professionally managed account, such as the Harvard endowment or the teachers’ pension funds, for example.
Third, Social Security is an entitlement insurance program that redistributes savings between those whose circumstances trigger payment from those who die before retiring or those who may not have many survivors, etc. An individual’s payment from Social Security is a payment from an insurance pool that depends on contingencies such as being retired and having a living spouse and dependents, having a disability, and others. Social Security redistributes in the way that, say, fire insurance redistributes. Those in the pool whose house burns get the benefits from the premiums paid by those with houses that burn and those with houses that do not. Analogously, every worker and his or her family get some insurance payment in the event of retirement and disability. Social Security could be even more progressive and insure elders against poverty. It would take relatively small increases in premiums—garnered by raising the tax rate or expanding the revenue base—to raise benefits for the very poorest Social Security recipients. But no practical and proposed expansion of Social Security does enough to replace the 70 percent of middle-class wages needed to sustain a preretirement lifestyle for these workers. Therefore, like the mixed systems around the world, the combination of GRAs and Social Security would create a system of fully funded advance accounts that would replace about 70 percent of workers’ preretirement income in retirement—enough in most cases to maintain preretirement living standards into old age.
Economists consider helping an economy achieve growth and equity as another positive criteria for a pension system. 67 A welfare state that assures safety nets and household income during recessions provides long-term capital and efficient ways to smooth consumption from one period to the next, thus helping workers and firms take risks and find patient capital. Good pension systems provide smooth off-ramps from work to retirement and help incentivize hard work and investment in employees who know there is assured old-age income. A pension system that helps workers and business accumulate talent, skills, and capacity and that smooths transitions can bolster economic growth and equity. By arranging to have retirement savings invested in long-term savings vehicles, the economy would have more patient finance capital for long-term investments. Today, retirement savings in 401(k)s and IRAs are in liquid, short-term funds; they cannot be invested in infrastructure investments or other long-term ventures. The GRA accounts, in contrast, are nonliquid and can be invested in long-term accounts.
A Good Pension System Can Replace a Working Longer Consensus
What distinguishes a progressive, or “left,” liberal vision of a Working Longer Consensus from a “right” position in the Working Longer Consensus? My proposal for a fully funded, adequate, and equitable pension system does not replace the goal of allowing every older adult who wants to work to work. At heart, welfare states determine who has claim to income without working for pay and in doing so provide those who want to work with more bargaining power. Therefore, a pension system that provides adequate income and allows older workers to work is one that maximizes equity, adequacy, and economic growth. Increasing the elderly’s labor force participation and having a generous pension system encourages work: it means that older workers work because of attractive pay, working conditions, and hours. A liberal system leans toward outcomes in which older workers are working closer to their own terms than those of an employer. Denmark, Sweden, and Norway have somewhat robust rates of elderly labor force participation (8.6–18 percent, percent) and low elder poverty rates. 68 But when more than one out of five older people are working, the elderly poverty rate—an indication of less generous pensions—is higher. In the OECD, the twelve nations with elder labor force participation rates higher than the United States’ 20 percent are those with weak pension systems and high rates of elder poverty. 69
The dynamics of pension arrangements remain at the center of the emerging Working Longer Consensus. Since pensions are a large part of the welfare state, they help to regulate the size of the labor force (and whose time is commodified). The generosity of the welfare state is highly vulnerable to shifts in political will, such as the rise of austerity in the past ten years, which has fundamentally redefined who deserves income without working.
Gösta Esping-Andersen describes welfare state reforms that involve increasing payroll tax contributions and cutting benefits. He notes that raising taxes and cutting benefits were companions to liberal labor market reforms that weakened labor standards and unions and “recommodified labor” with policies that pushed for more paid work among elders and parents of young children. 70
Secure retirements are an extension of workplace norms and bargained paid-time-off benefits that yield the weekend, sick leave, holidays, and vacation. A working longer consensus is a reversal in paid-time-off provisions. It has eroded the weekend and evenings and time off and is attacking retirement. A liberal welfare state allows a job to any adult who wants to work without regard to age, color, creed, sex, national origin, gender identification, or religious affiliation, and it provides a high universal basic income to everyone after a lifetime of work, so that the ability to work and retire will pressure employers to improve jobs and productivity to the benefit of all.
The bottom line is that good pensions give older workers a secure fallback position from which to search for jobs and negotiate wages, hours, and working conditions on their terms. Such circumstances would encourage work. However, an austerity policy also encourages work: acceding to the Working Longer Consensus by cutting pensions to encourage work will give employers the upper hand.
Conclusion
This article identifies three false beliefs about hard limits and relationships between the elderly working longer and health, spending on children, and economic prosperity. Those beliefs are the foundation for the consensus that older people’s time should be commodified. The three facts challenging these false beliefs are as follows. First, because longevity gains and pension wealth, like many measures of economic well-being, are growing more unequal across populations, forcing elders to work, in particular in the United States (and in other nations), will create more inequality in a crucial but overlooked source of well-being: paid time off at the end of life—retirement time.
Second, calls on both the left and the right to make the elderly work more draw on the false premise that spending on the elderly reduces spending on the young, whereas I find that there is no trade-off between national spending on the elderly and spending on children. Political science research on “age-weighted welfare states” fueled this belief.
Third, far from benefiting both firms and workers equally, adding more elders to the labor market disproportionately benefits employers, as those older workers enter the workforce with few choices and therefore weakened bargaining power.
This article does not explore how to pay for decent pensions—every society makes its own decision about transfers—but there is no evidence that more spending for pensions comes out of education spending or cash support and health insurance for children and working families. Scholars and policymakers have many choices in deciding to make retirement available to all who want it, but no ratio (e.g., a dependency ratio of workers to nonworkers) determines the sustainability or affordability of pensions.
Erik Olin Wright argued that envisioning a good society needs practical sustainable proposals and honest acknowledgment of hard limits. I add that challenging false beliefs about hard limits is also important in envisioning a good society. My example is pension reform. This article shows that the false belief that spending on the elderly hurts children, while societies that spend more on children spend more on the elderly; the false belief that everyone is living longer, while longevity is distributed by class; and the false belief that employers are indifferent to pension policy, while employers want less generous pensions and a more malleable pool of elderly workers, form the basis of the Working Longer Consensus that justifies cutting pensions. A capitalist society fashions social insurance programs to commodify labor. The movement to cut pensions and promote work at older ages denies an older person a genuine choice between retiring or working, while it benefits capital and the well-off.
Footnotes
Acknowledgements
I would like to thank the excellent assistance from Melina Moe and Aida Farmand and the editors of Politics & Society for very helpful comments on the earlier version of the article. We also benefited from insightful comments from Fred Block, Magali Sarfatti Larson, and Will Milberg.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was funded by a grant from Bernard Schwartz.