Austerity is the only Game in Town

Introduction

Pension reforms are targeted at improving the way governments in Europe respond to the need to maximise the well-being of its ageing and working populations, reduce uncertainties through establishments of National Insurance Acts and prevent the risks of poverty among the ageing population after retirement (Barr & Diamond, 2006, p. 5). Pension reforms are also important to governments that realise the significance of having a minimal disparity between the low income and high income earners after the retirement age. The United Kingdom’s population is ageing, hence the need for the governments to adopt political, social and economic changes that are often caused by dependence of the ageing on the working population. Austerity measures are taken by the political system to ensure that the government does not incur high expenditure in payments of pension. The rapidly ageing trend in the UK is caused by various factors, among them declining fertility rates where women in the current generation have fewer number of children as compared to the past generations (Trades Union Congress, 2013, p. 12). Improvement in aspects such as health care, nutrition and preventative care has also lengthened the life expectancy in the United Kingdom. Almost a third of UK’s current young population is expected to live up to a hundred years as compared to the past where only a minority attained the age of a hundred years. With the ageing population, the UK government appreciates the need for the working population to save more through varied contribution schemes. Sweden is no exception with the rising number of ageing population, where almost a fifth of the population has surpassed the age of 65 (Olofsson, 2010, p. 10). The number of people above the age of 80 is expected to grow in future, hence causing a major demographic change in the nation. The ageing population in Sweden creates the need to undertake major austerity changes to ensure the group’s welfare is improved even in their old age.

Germany has also been hit by a growing number of the ageing population, hence posing a threat to its position as Europe’s largest economy. Older people in Germany are more concerned with their pension incentives and their ability to take care of themselves. The low birth rate in Germany continues to persist, indicating that the nation will be affected by the large number of elderly people in the coming decades (Hoff, 2008, p. 12). With the ageing trends on the rise in the three countries, it is necessary that the governments seek ways through which they can take care of the elderly without straining the national budgets. One way to enhance austerity is to implement old age pension schemes that make older people less dependent on the government and the working population.

Theoretical background

Europe is getting older, hence the need for governments to take measures to have reliable and accurate estimates into the wellbeing of future demographics (Bonoli, 2000, p. 5). With statistical projections on the number of the future older populations, it is then possible for states to improve on their policy-making and be able to counter social challenges associated with old age (Gruber & Wise, 2001, p. 7). As the average lifespan continues to increase, it is important to determine austerity changes on pensions and how policy debates will be utilised in enhancing the welfare of the ageing population. The ageing population has a tremendous impact on the social services such that families and taxpayers could be forced to cater for the costs of caring for the ageing people. The ageing population in the United Kingdom increases the health care bill with incidences of Dementia and hearing complications likely to increase in the coming years. While one in six of the UK population is currently aged 65 and above, estimates project that the number will be one in four people by 2025 (Bozio, et al., 2010, p. 8).

The pension population is still growing with much of the current public budget targeted at enhancing the welfare of the elderly. However, austerity changes need to be implemented the soonest possible, before the public expenditure escalates to crisis levels. Failure to implement any changes would mean that the UK will be spending an extra £10 billion for every one million people that fall over the current pension age (Norton & West, 2014, p. 13). The annual expenses of medical and welfare services for the aged is on the increase with hospitals across the United Kingdom, Sweden and Germany experiencing an increase in admission and re-admission rates for older patients. The current projections also indicate that there is a likelihood for a higher number of seniors living on their own. Therefore, more people will require regular care, increasing care needs of older patients. The old age dependency ratio is also on the rise among those who have already attained the state pension age such that the younger population is finding it hard to cope with the pressure to take care of their elderly dependents (European Union, 2013, p. 4).

The fact that a higher number of older people in the society reduces the number of working population is also a major worry for the nations since it means that most of the industries and other sectors of the economy will be understaffed in the future. The low birth rates and higher life expectancy in European nations most notably Sweden, Germany, United Kingdom and Holland are likely to be the centre of political austerity in the future, thereby raising the need to take caution when designing and implementing effective pension reforms. A transition towards the ageing population is currently being witnessed across Europe, bringing the necessity to have an explicit knowledge of the social and economic implications of such trends. The workforce is mostly shrinking in Europe as a result of the high number of people who are retiring (Hoff, 2008, p. 3).

The already low number of working population will experience difficulties providing for the social expenditure required by the ageing population. Ireland is among the countries in Europe that have recorded the highest percentage of young population at 22 % compared to Germany that has a share of 13 % (European Union, 2013, p. 3). Population ageing in Europe began a long time ago thereby implying that the trend is likely to persist for several decades. The declining proportion of the working populace means that the European nations will have to rely on the services of immigrants to provide the much-needed labour in the industrial and services sector. The low levels of fertility in Europe also aggravates the situation since it implies that there will be fewer births across the European nations, and the dependency ratio is likely to increase in the long run (Trades Union Congress, 2013, p. 2). This implies that in order to prevent crisis in these nations, the best approach to take will be to implement austerity measures that focus on promoting economic and social stability.

Figure 1: Europe’s Retirement age by the year of birth

Case Comparison between United Kingdom, Sweden and Germany

The United Kingdom has made significant efforts in enhancing the lives of retirees so as to reduce the need for them to rely on dependents. With the amount saved through contribution initiatives, the ageing people are able to take care of themselves with regards to the health cost and welfare personal expenses that could be achieved with the use of their own savings. United Kingdom has a unique pension structure based on four components. These include; Basic State Pension, earnings related benefits and means tested benefits that all aim at enhancing the lives of retired individuals (Thurley, 2008, p. 4). The Basic State Pension is in accordance with the Social Security Act of 1975 which requires that individuals pay their National Insurance contributions 90 % of their working lives. The earnings related benefits involve the situation where those in employment make contribution on the pay on a as you go basis, to enhance the welfare of retirees who have attained age of 65 for males and 60 for women (OECD, 2013, p. 3).

Earnings related pension was relied on by the United Kingdom governments from 1978 until 2002, when it was replaced by the State Second Pension where besides the Basic State Pension, individuals are required to make personal contributions according to their own decisions (Thurley, 2008, p. 4). The purpose of the pension schemes in United Kingdom just like in Sweden and Germany, was to ensure that individuals cease from their myopic attitude that lead them to saving less than they ought to. The United Kingdom government is keen on designing and implementing pension reforms aimed at averting poverty among the elderly and reducing government expenditure on pension in the future. It is strategic for the government to look into ways through which the need for dependence on family and charity support could be reduced among the ageing population.

United Kingdom is focused on reducing demographic risks by encouraging individuals to be personally responsible for their future by making mandatory contributions. Since 1908, when the Old Age Pension Act came into force in United Kingdom, major reforms have been undertaken to improve how contributions can be made throughout the working life of the population (Thurley, 2008, p. 5). With the increasing government expenditure on the ageing population, it is appropriate that the working population is encouraged to plan for the future and look for additional ways to save besides the mandatory contributions required by the state. Sweden has made major changes to its pension policies to suit the current changes in demography. 1999 marked the year for major pension reforms where the benefits were to be tailored towards taking care of the increased life expectancy and the need to rely on accumulated distributions throughout the working period (Scherman, 1999, p. 3). The five political parties in Sweden came together to enact the bill that shifted pension based on fifteen best earning years, to pension based on full time life earnings of the individual.

The policies were aimed at lengthening the retirement age and encouraging individuals to ensure they avoided early retirement as this would see them reduce the amount of pension to be paid to them. Politicians felt the need to enhance flexibility in the financial and political system, by lowering pension capital and lengthening the period of payment of the pension (Palme & Svensson, 1997, p. 6). The first pension subsystem in Sweden was based on a flat rate, with earnings related to a certain limit set by the government. However, this seemed to only work well for those that had a higher income level as compared to the low-income earners, since pension was based on 60 % of the retirees past earnings. With the flat rate system, those who were paid the pension fell within the age bracket of 40 years and above, having lived and worked in Sweden from the time they were 16 to the time they attained the age of 65 (Barr, 2013, p. 7).

However, with the 1999 reforms, measures were taken and the benefit became dependent on accumulated contributions and life expectancy of the retiring group and the economic changes at the time of retirement. The government of Sweden set a rate of 18.5 % as the amount on the earnings to be remitted for pension (Kok & Hollanders, 2006, p. 4). Through the reforms, the current workforce is encouraged to work for an additional 26 months so as to reap higher pension amounts necessary to take care of their welfare after their retirement (Barr, 2013, p. 7). The need to work for additional months came with the new system where the benefits would go down as the life expectancy of the working population increased. This implies that early retirement will be detrimental to the early retirees, therefore discouraging individuals from retiring below the age limit. With the new pension system in Sweden, it is likely that the government will be able to achieve its goals to enhance savings for the working populations, improve mobility in the labour market and ensure less redistribution of low incomes to higher incomes. Germany has also made significant changes in its pension policies due to political development. The nation utilises the pay as you go system which takes into account of the contributions made for the period under employment.

Germany previously relied on the flat rate system just like Sweden and the United Kingdom, but the system later changed due to the demographic changes that were witnessed, such as the rising incidences of life expectancy. Pension reforms of 1992 were tailored to ensure that everyone who was employed paid the funds with the rate of 19.3 % of gross earnings. The need for the pay as you go system was based on the necessity to reduce over dependence of the ageing population on the working group, by enabling the aged to have a secured standard of living after their retirement (Bosrche-Supan & Wilke, 2003, p. 5).

The reforms in Germany were aimed at encouraging people to postpone their retirement. Enlargement factors were used in lowering the package for those who wished to retire earlier by 0.3 %, while those who retired at the regular retirement age of 65 would be rewarded with a 0.5 % increase for retiring after the regular retirement age (European Union, 2013, p. 6).

Figure 2: Proportion of People in Work Age Group and Gender, 2010-2012

Previously, the pension system in Germany faced criticism from the fact that it relied on the net income of individuals as opposed to their gross earnings. However, there was the need to find a solution to maintain the living standards of retired individuals and enhance redistribution of the burden of demographic development, to enhance the welfare of the ageing population. The reforms on the pension schemes in Germany, United Kingdom and Sweden, were all outcomes of political actions where parties felt the need to ensure that demographic changes were well addressed, and that the state took measures to deal with the increasing number of the ageing population. The reforms therefore proved to be leaner for the working population since they led to a situation where flexibility was enhanced.

The reforms provided individuals with the opportunity to enjoy pension before they reached the retirement age (European Commission, 2007, p. 3). However, to ensure that the ageing population is not dependent on the working population and that the government was able to reduce the cost of taking care of the pension population, the reforms in nations such as Germany and Sweden also aimed at discouraging individuals from retiring early. It is all-important that folks are able to enjoy the full package of their security savings, to assure them of more financial incentives to improve their social welfare.

Discussion

The UK has made significant changes to its pension policies throughout the years. The recent efforts where the government of United Kingdom is focused on introducing private pension and encouraging a single tier pension lead to the applications of austerity programs, where individuals are encouraged to take personal responsibility of their own financial security. This implies that everyone has to cease from decisions that are myopic, to ensure that they save enough to sustain them during retirement. The design of public old age pension is dependent on the motives behind government interventions in the pension reforms (Norton & West, 2014, p. 4). The central focus is on the need to prevent poverty in old age such that the ageing population does not have to depend on their families and charities for support. The UK government has at some point made contributions mandatory so as to ensure individuals’ income during retirement is proportional to the income they enjoyed when they were still employed. The Old Age Pension Benefit Act of 1908 paved way for pension schemes in the United Kingdom but was limited by the fact that it was non-contributory (Thurley, 2008, p. 3). However, with the need to sustain old age after retirement, the UK government appreciated the significance for those in the lower income brackets to make mandatory contributions to the government.

Pension has therefore for a long period been aimed at providing a safety net against old age deprivation. This means that it is important for employees to make contributions throughout their working years so as to be financially safe when they retire. The pension reforms in the United Kingdom have been caused by the economic crises, such that the government is keen on reducing its expenditure on the pension it has to pay to retired ageing populations in the future. This has led to the establishment of the flat rate system where a fixed percentage is used as the contribution rate for the working populations towards their retirement benefits (Nordic Social-Statistical Committee, 2008, p. 3). While using the flat rate system, it means that the current working population will have to work for more years compared to the previous generations to ensure they enjoy the full package of their retirement benefits. The ageing population is rising such that while assessing the pension plans that nations subscribe to, the working population will be required to pay longer hence the income enjoyed by retirees will be higher. This is the reason why the nations such as Germany, United Kingdom and Sweden have taken measures to review their pension system to reduce excess funding by the public on welfare for the retired populations.

The austerity measures are in line with the fact that some of the budget burden need to be borne by individuals in the public sector through reductions in pensions paid to the retirees. Sweden and Germany seems to have taken similar measures to ensure that it does not incur much expense when the current working population retire. In Sweden, unlike in the past where the pension was based on 60 % of 15 out of 30 highest income earned, Swedish government decided to set the contribution rate at 18.5 % while considering the implication on the rising life expectancy (Olofsson, 2010, p. 12).

The increasing life expectancy creates the need for a reduction in government expenditure on benefits hence implying austerity measures taken to take care of the demographic and economic changes. The governments of Sweden and Germany have also put in place flexible retirement where individuals could opt to retire at an earlier age. However, they have to accept the fact that they will be unable to enjoy the full package like they would when they retired at the maximum retirement age. Nevertheless, major plans to cut back on the pension are favourable since they make the economic system financially and politically stable. Financial and political stability means dealing with demographic, political and economic risks in ways that improve the sustainability of the society. Austerity measures, in this case, are taken to take care of the rising support ratio as a result of an increase in the ageing population. This is because with the current rise in the life expectancy rates in Germany, Sweden, United Kingdom and other European countries such as Holland, failure to take strategic measures will lead to higher pension pay for the states in the future. Austerity measures are therefore necessary as they are key to designing ways to reduce the demographic and economic risks through pooling the risks by National Insurance Services as the case of Germany, neutralising the risks through diversification such that there are Basic State Pension plans and earnings-related benefits (Feldstein & Siebert, 2002). Risk could also be eliminated by making contribution mandatory at the flat rates designed and implemented by the government. Measures to reform pension policies are therefore largely political as the parties engage in enhancing ways through which the state could be financially and socially stable.

Conclusion

It is important that the working population be made to reduce the risk of living in poverty when they retire by making them responsible for their current and future life. This means that the current working population has to be involved in appreciating the role the government plays in the economy to improve socio-economic welfare and also acknowledging the fact that it is imperative for the population to ease the pension burden for their government. There is a need to ensure that the working population is made to reach the maximum retirement age set instead of retiring at an earlier age. This implies that the government will still be better placed to provide the pension amounts needed by those who would have stayed in their jobs until they reach the statutory pension age. Since the issue of ageing is still likely to rise in the coming decades, it is strategic that policies be tailored on enabling many employees to stay longer in their job markets. This implies that the statutory pension age is likely to be raised in future in many European nations to be above the 65 years limit. The fact that it is necessary to reduce dependency ratio also makes raising the pension age strategic since there will be a higher number of the older population still in the labour market. Austerity measures are to an extent important in cutting the government expenditure in taking care of the ageing population since higher expenses could lead to crises from an inability to take care of other elements of the economy. Older people in the European Union tend to enjoy living standards almost similar to the working population such that even in the times of economic crisis the ageing population is still protected.

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