The issue of pension provision

The issue of pension provision is becoming increasingly important for our ageing society. How can a stable pension be secured in the long term, even if more and more older people have to live off fewer young people?

The pension system is based on the so-called intergenerational contract. This term refers to something very natural: the working generation provides for the retired generation and thus receives the right to be provided for in old age by the coming generations.

Behind this is a principle that is probably as old as mankind itself: First the parents provide for their children, and then later the children provide for their parents. How else could it be? After all, all goods come from those who work.

The intergenerational contract institutionalizes this principle at the societal level. It eliminates statistical imponderables and thus creates security and predictability for everyone. Without the intergenerational contract, the material situation of parents depends directly on the economic success of their children. As a result, some elders – although they have worked hard all their lives – have to live in abject poverty due to events for which they are not responsible. For example, because children die early, are unable to work or turn away from their parents.

The pay-as-you-go pension system, based on the intergenerational contract, decouples the economic situation of parents from that of their children and instead makes them solely dependent on the economic situation of society and the contribution they have made to society during their working lives.

In this way, the pay-as-you-go pension system follows a simple principle: according to the individual four-earnings capacity of the recipients, it distributes what there is to distribute. If society produces a lot, pensioners receive a lot. If it produces little, there is little to distribute.

At the same time, the pay-as-you-go pension system is also the most efficient. What comes in is directly redistributed by the state – and without the intention of making a profit. Here, few resources are left in the pension system itself, and the distributed contribution for pensioners is maximized. There is also little room for error because the system always works with what flows to it from society – according to its overall economic situation.

The situation is different with private pensions. Here, most people are dependent on support from financial service providers, whose remuneration reduces their later pension. In addition, there is a large margin for error due to incorrectly or unhappily chosen wealth accumulation strategies, investing in failing projects or businesses, or choosing an incompetent or even fraudulent financial service provider.

In some ways, private retirement planning is a step backwards. Much like parents who depend on their children, retirees then depend on their investments. It’s every man for himself, and statistical risks are not eliminated. Some then lose their pension assets through no fault of their own.

The best system is therefore the pay-as-you-go pension. To make it work as well as possible, there are a few basic conditions:

The more people who participate in the pay-as-you-go pension, the better. Therefore, the self-employed, politicians, civil servants and employees should all pay into the same system.
It should be distributed according to the amount of work done during a person’s lifetime.
A dignified basic income should be guaranteed to all pensioners. Dignified means that it must take into account special needs arising from advanced age and can thus be higher than the general basic provision of a country.
A good example that this system works in Austria. There, the average monthly pension is about 800€ higher than in Germany while the minimum pension is still almost 300€ higher than in our country. Austria follows the above principles to a large extent.

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