Political Studies Review: What are the major functions of the welfare state? How would you define it?
Prof. Vincenzo Alfano, Prof. Pietro Maffettone: The welfare state is the product of a historical process. In part, it was dictated by the recognition that some of the risks that people faced in a market economy were predictable and widely dispersed (e.g. unemployment). At the same time, there was also a strong political element, namely, making market capitalism less exposed to revolutionary pressures and more able to compete, as a social model, with the Soviet block.
Does it work? Much will depend on the kind of benchmark one is inclined to use. Compared to a world without any kind of welfare state, one that features some kind of welfare state in an otherwise capitalist market economy is certainly progress. At the same time, the welfare state as an institution has also been prone to be abused and to inefficiency. Nonetheless, what we can say is that, as all kinds of human creations, the welfare state has costs and benefits and those need to be balanced.
Can a ‘pay-as-you-go’ (PAYG) system be efficient considering recent demographic trends? What are the major flaws?
Luckily enough, life expectancy greatly expanded in recent years, for most people, and in most countries, especially in Western ones and in many countries in East Asia. This means that we live longer, and this is great news. However, in many rich countries, fertility is going down dramatically (Italy and Japan are the poster child for this kind of predicament). These two trends, taken together, suggest that the working base, those who are supposed to pay pensions to those currently (at any point in time) retired, gets thinner and thinner, while the set of retirees grows. There is no need for complex actuarial calculations to understand that this trend is unsustainable. Actuarial calculations will tell us ‘when’ not ‘if’.
The major political flaw in the system is that people are extremely averse to loss: it is extremely hard to withdraw existing benefits to a large class of citizens. What’s the upshot? Sadly, some pain to come, all other things being equal (for example, massive immigration might make other things not equal). Research suggests that, if current trends persist in Germany and France, there will be one retired person for every two working people by 2050. In Japan, we already reached a 2 to 1 ratio, and by 2050 it will eventually reach 1:1. This is, of course, unsustainable, unless we give extremely low pensions to retirees, or ask extremely high contributions from workers.
Would you say that ‘personal pension system’ (PPS) is a good alternative to PAYG? Is intragenerational fairness possible using this system?
It is of course, a potential alternative, as you highlight in the question, but it is especially hard to ensure intragenerational fairness through this kind of system. We also need to recognize that most people in most countries, don’t save enough over the course of their lives to actually derive a sustainable pension from their saving pool. Of course, what is a sustainable pension is debatable. But one thing seems clear, if we all had to rely on our efforts alone, then, we would have to strongly alter our lifestyles, and perhaps even the way in which picture some of the major financial decisions we take over the course of our lives. For example, homes would not be bought to pass them on to one’s children, but to be able to survive after retirement by selling the asset.
What about the Italian case study? What are the major lessons we can learn from it?
Italy represents a good case study, since it has one of the oldest populations in the world, and thus all the pension-related issues are amplified in the Italian context. We can learn mainly two lessons: the first is that a pension reform that would make the system sustainable over time is hugely unpopular. All Italian politicians that shrunk pension benefits paid an important personal cost in terms of their popularity and their political careers.
Yet, it is also important to highlight that pension system reform is not the kind of issue that a government can push back into the future indefinitely. At some point, the pressure on the public purse becomes too hard and tough decisions have to be made. In fact, many would argue that, at least for Italy, we have long passed that particular moment.
Who will benefit from the PPS system in Italy, and who will be negatively affected?
If we talk about people receiving a pension over their contribution, there would mainly be affected people who live on average less than the country-wide life-expectancy, thus people from the Southern regions, especially males. Of course, the other half of the coin is that women and Northenerns would be negatively affected. It is anyhow important to highlight that many people benefit of a pensione sociale, which despite the name is not actually a pension but a form of welfare for the elderly who are unable to claim a proper pension. These are mostly located in the South – the South being poorer and featuring a wider proportion of underground economic activity. Of course, a PPS reform that would change this ‘pension’ would affect them dramatically.
What approach, or what changes to existing approaches should be considered to reduce negative outcomes of such a pension system?
Our idea is to define better the likelihood of reaching a certain age that each person has and to modulate the contribution over this variable. Pensions are paid as long as someone dies. The key variable here is how long one lives. We know that life expectancy depends on a number of factors, such as gender, residence, habits, marriage status, and so on. To base a pension system on a much more detailed estimation of one’s expected lifespan, as the private system already does, is the first step toward a more (actuarially) fair pension system.
What are the key contributions your article brings to the field?
We offer a point of view that reverses the usual narrative on who ‘contributes the most’. Often, richer regions in the country are seen as net contributors to welfare payments, while the poorer regions are seen as getting disproportionate benefits from this equalization. Yet, and this is what we have tried to show in our paper if we look at how long people benefit from a given welfare measure (something that is connected to life expectancy for pension), it turns out that the poorer regions, on average, contribute more than the richer regions. The sustainability of the pension system in Italy, to the extent that it is sustainable (not for long!), is aided not worsened by pension benefits granted to citizens of poorer (southern) regions.
Article: Alfano V., Maffettone P. (2020), No Country for Old (Poor) Men: Fairness and Public Pensions, Political Studies Review 2021, Vol. 19(1) 137–147.
Questions and production
Dr Eliza Kania, PSR/Brunel University London