The conflict between generations: Fact or fiction?
Expect the issue of solidarity between generations to become a major policy challenge in the years ahead, and not just in OECD countries. Here’s why.
Different generations depend on one another in complex ways. “Intergenerational solidarity” is a mechanism for supporting mutually beneficial exchanges, both monetary and non-monetary, between generations. These exchanges are too often seen as one way: younger workers paying taxes to support older people’s benefits and healthcare. In fact, they go in both directions and involve both the state and families: forwards, towards younger generations, are investments in infrastructure, education, innovation and bequests to one’s heirs; and backwards, to older generations, are pensions and care, and public and family care for older people. Informal care–for frail older people or grandchildren–also flows in both directions between the generations.
These two-way exchanges underpinning intergenerational solidarity work well in times of demographic balance. But, as is well known, we are not in such a time. The OECD celebrated its 50th anniversary in 2011. In 1961, the year of the OECD’s birth, around 18.5 million children were born in the 34 countries that make up the current membership. That was subsequently to prove about the highest number of the post-war baby boom. Relative to total population, the number of births halved over the five decades since the OECD was founded. Life expectancy at birth has risen by ten years since the OECD was founded, to 76 years for men and 82 for women. This is a remarkable achievement and very good news.
However, the result is population ageing, which could prove a particular stress point for relations between generations. There are currently four people of working age for every one of pension age on average in OECD countries. This ratio will fall to three-to-one by the late 2030s and two-to-one by 2050. Future generations may be less willing and able to shoulder a continually growing tax burden to support a growing share of inactive people. Informal care for older people was easier to arrange when it could be shared between a number of children or in-laws. Families are not only smaller, but also more complex nowadays: a result of divorce, remarriage and lone parenthood. These developments weaken the bonds between family members. More women–who traditionally took on most of the care burden–are in paid work and facing a potential conflict between their career and caring.
With these pressures, it is useful to know the state of relations between generations today. Although it is difficult to measure intergenerational solidarity, some evidence can be gleaned from attitudinal surveys. One such survey, conducted in 2009, asked the provocative question “Are older people a burden on society?” The great majority of citizens disagreed with this statement in 21 European countries that are members of the OECD. Some 62% of people strongly disagreed, with a further 23% somewhat disagreeing. Only 14% agreed with the statement to either degree.
There were significant patterns in responses. People aged 40-50–who expect to retire in the next 10 to 25 years–were most likely to disagree that older people are a burden, while those in their 20s were somewhat less likely to disagree. Interestingly, it is older people themselves who tend to think that they are a burden on society, with people aged 55 and over more likely than average to agree with the statement used in the survey.
Looking at cross-country differences, people were more likely to agree that older people are a burden in countries– such as Belgium, the Czech and Slovak Republics, Hungary and Portugal–where the over 65s receive a high proportion of their incomes from the state. In contrast, intergenerational relations are stronger where other sources play a more important role in providing old-age incomes, such as Denmark, Ireland, the Netherlands and the UK. There is a similarly strong relationship between attitudes and the proportion of 60-65 year olds working and on demographic measures of how old the population will be in the future.
What are the implications for public policies? Consider pensions, which are the largest element of public spending affected by ageing (with health and long-term care making up most of the rest). Intergenerational solidarity is at its strongest when older people are seen to be taking actions to help themselves, through private saving for retirement and/or continuing to work. This provides support for the OECD’s three-pronged strategy for long-term pensions policy.
Public benefits remain the backbone of retirement-income support in OECD countries, accounting for 60% of old-age incomes on average. OECD countries spent, on average, around 8.5% of national income on public pensions in 2010. Demographic pressures alone could approximately double that proportion by 2050, although expenditure trends differ substantially between countries. However, recent pension reforms are currently forecast to restrain the growth in spending to 11.5% of national income. Many pension reforms will result in large cuts in benefit levels at a given retirement age and might risk a resurgence of old-age poverty in the future. Countries face a difficult challenge in balancing social adequacy and financial sustainability of pension systems.
A key solution is longer working lives. Half of OECD countries are already increasing pension ages or will do so. However, most of these hard-won increases will be outpaced by increases in life expectancy. This is why a growing number of countries are opting to link benefit eligibility or levels automatically to life expectancy.
Encouraging people to work longer at a time of high unemployment does not seem a good idea to many politicians and voters. But keeping older workers in the labour force does not reduce job opportunities for the young. This is clear both from looking at patterns of employment of younger and older workers across countries and in a single country over time. Yet this misperception still has strong currency. In only four countries European countries–Denmark, Ireland, the Netherlands and the UK–did a majority of people disagree with the statement “as older people work until a later age, fewer jobs will be available for younger people”. Support for this fallacy was strongest in Greece, Hungary, Italy and Portugal.
Around half of OECD countries’ pension reforms involve greater targeting of public benefits on those most in need. This has occurred either through sparing lower-income workers from the full force of pension reductions or by increases in safety-net benefits. Targeting offers a second way of improving both adequacy and sustainability. But it would, of course, further weaken the link between pensions and contributions, which is already being powerfully tested by population ageing.
Finally, as public pensions are scaled back to help keep their cost affordable in the future, more private retirement saving will be needed to fill the pension gap. This greater diversification of sources of retirement incomes is a more secure way of providing pensions.
Intergenerational conflict over public resources would be damaging for all age groups and generations. It would imply a breakdown not only in the state’s role, but also in the informal nexus of support within and between families which is so vital a complement to the welfare state in providing the essential glue which holds society together.
The ageing challenge affects most of the world, but it is strongest in Asia. The demographic transition that took over a century in Europe and North America will happen in less than a generation. Ageing Asia needs to face these problems soon and there could be lessons in the way OECD countries have responded.
OECD (2011), Paying for the Past, Preparing for the Future: Intergenerational Solidarity in an Ageing World and Pensions at a Glance: Retirement-Income Systems in OECD and G20 Countries, Monographs, Paris.
For more articles on pensions, see www.oecdobserver.org
"Ageing Asia", in OECD Observer No 290-291 Q1-Q2 2012.
©OECD Observer No 290-291, Q1-Q2 2012
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