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What Would Bismarck Have Done?

Can a 19th century German leader inspire his country to solve its pension woes?

December 2, 2003

Can a 19th century German leader inspire his country to solve its pension woes?

The number of solutions under discussion for Germany’s looming pension crisis is legion. Basically, they revolve around the following principles:

Reduction of pensions and increasing pension contributions — with and without taking into account whether the retirees have children.

Transition from the current pay-as-you-go method to a wide variety of funded systems.

Raising the legal — and, more importantly, actual — retirement age to 67. The legal retirement age currently is 65, but the actual retirement age is only about 60 years.

Increasing immigration from abroad to add more young workers to the labor force.

Increasing the population by having more children.

Increasing labor force participation, which presently stands at 71% in Germany, compared with 76% in the United States — and 79% in Sweden.

All these initiatives are helpful. Nevertheless, it might be useful to tackle the problem at a more fundamental level.

When the German Chancellor Otto von Bismarck (in office from 1871 to 1890) introduced Germany's first social security system in 1889 — and the world's first old-age social security program — the average life expectancy of a German man was around 72 years.

The retirement age, however, was set at 70.

This meant that a German employee would work his entire life and — near the end — would enjoy a relatively brief “sunset of life,” financed by the solidarity of all workers.

Today, the average life expectancy of an employed German man hovers near 80 — while the actual retirement age is 60 years.

What was formerly the twilight phase of a worker's life is roughly now equal to the length of a person's youth.

And therein lies the root of the problem. People are getting older and older, which means they are able to work for longer periods — but are unwilling to do so.

And those who are willing — and their numbers are quite large, as the many independent businesses run by senior citizens show — are not allowed to do so.

Yet, even as people live longer, the number of retirees is growing, compared to the number of workers.

This cannot end well. Then, I ask this question: If Bismarck were alive today, what would he do?

Taking his groundbreaking social security legislation at the time as a yardstick, he probably would increase the retirement age to 78.

If we give him the benefit of the doubt for mellowing in old age, he perhaps would have lowered it to 75.

Consequently, the third and fourth periods of life — roughly from age 60 to 75 in the third, and 75 and older in the fourth — would extend a person's “sunset of life” phase.

Those wishing to stop working earlier could do so by living on their savings — or by accepting deductions from the state pension based on an actuarial basis.

Such changew would help put the ratio of two workers for every one retiree back in balance.

Financing the pension system would not present any more problems, since the required level of contributions into the system would be smaller — and overall economic growth higher. It would also solve the problem of public finances.

I have nothing against the third phase in life. For many, it is — without a doubt — a significant improvement in the quality of their life. But, either society — or the individual — must be able to afford it. In theory, this is possible.

For example, society could use productivity gains to finance the third phase in life.

This would be done instead of distributing gains to employees in the form of increases in their real wages (present consumption would thus be shifted into the future).

But if this does not garner enough support, we will have to forego this third stage in life. Productivity gains cannot be used twice.

Opponents of this proposal will argue that drastically raising the retirement age will drive up unemployment to unacceptable heights. This is true — as long as wages remain the same.

But this is an unacceptable, one-sided view of the matter. When the labor supply increases, wages automatically decrease until the supply and demand model of the labor market is in balance.

We might even go as far as to say that by keeping the retirement age low, the level of work available in the economy would be kept artificially scarce — and wages correspondingly high.

If wages were lowered, Germany would have fewer problems with competitiveness on international markets.

Another argument is that people over the age of 65 cannot keep up with 20 or 30-year-olds in the workplace.

But this only applies to certain areas — for example, physical labor or work in which fast thinking and flexible creativity are required.

It does not apply to jobs in which experience — or a network of relationships — is key. Why should companies not market their services using their employees' various abilities?

This is all the more vital as the demand for physical labor declines — and that of know-how work increases.

I know that such ideas sound intimidating, and I suspect that they can only be realized politically, when economic pressure is greater.

Remember the uproar when, in April 2003, the Rürup Commission suggested gradually extending — over a period of 30 years — the retirement age to 67?

What I am trying to illustrate is this: We are clinging to facts and conditions (like the retirement age of 65), which were once fixed for pragmatic reasons.

However, in a society in which all facts keep changing, we cannot stick to a retirement age that is fixed for all eternity without ultimately running into difficulties.

We must look at the big picture — and then many problems will seem less threatening.