Countries around the world face the recurring challenge of establishing the long-term feasibility and sustainability of social security systems, particularly state-sponsored pension programmes. The problems most burning include overpopulation as well as aging societies. This means that the proportion of economically active and economically passive population is changing unfavourably, making sustainability impossible on the long run. Capital raising schemes provide a solution for this problem by promising that the persons participating can ensure their livelihoods in their old ages by supplementing the state-provided pension from their deposit and the yields thereof during their active years. This, however, is an illusion.
After World War II, the economic performance during and after the baby boom period helped popularize the pay-as-you-go pension system: booming Western economies meant increasing tax and contribution revenues enabling a suitable level of support for the elderly. Since then, however, the demographic trends have shifted: fewer children are born, and people live longer. The global pension policy response to this challenge at the end of the 20th century was to, at least partially, capitalise the pension systems, thus popularising the capital collection system. Today, we know that was a mistake.
During the lifetime of an individual, consumption is relatively stable (slightly increasing over the lifespan), income, however, is cyclical, uneven. At the beginning of active years, incomes typically start lower and increase from there, only to cease altogether at the end of the active period. Tendency to save runs a similar course. Early years mean lower levels: during this time, people rather take out loans. Between 40 and 64 is the time when people save more than they spend, and, in the end, they live off their savings after their active years.
In a capital collection system, if a more populous age group would like to start living off their savings and the following generations are fewer in number, then the savings of the generation retiring will, even significantly, drop in value. The risk of collapse can be mitigated in theory if the capital withdrawal takes place gradually, or if the individual wishes to create an estate out of the savings. Further mitigation factors include high tendency of savings of the following generation or if you sell your assets in a developing country with a younger age structure.
Globally, however, the consumption during the pension years is always important from a macroeconomic standpoint, meaning the financial balance needs to be established on a short term, pension system notwithstanding. The reason for this is simple: whatever assets you collect during your active years in a capital collection system, you can only sell them to the age group currently preoccupied with saving i.e. those in their active years. Therefore, the axiom of longitudinal section stating that those who save during their active years get their own assets back after their active years has turned out to be merely a microeconomic illusion. [see the study of Mosolygó]
If we examine the connection between fertility and asset prices, we see that the demographic structure affects asset prices. It has been observed that the price increase of real estate, stock exchange indices, and bonds in the USA since the eightiesis is closely related to the fact that this period coincides with the time when baby boomers are in their “saving” part of their lives [see the studies by Barr and Abel]; the same effect can be observed in Germany, Japan and China as well. In Japan, this expansion stopped by the 1990’s. In China, it has reached its peak recently. All these lead back to demographic reasons. The more global ageing is, the more probable and unstoppable is the depreciation of assets. The macro-level balance between savings and consumption is established by the devaluation of capital collected.
The unfavorable change in demographic proportions affects both the capital collection and the pay-as-you-go system: both are threatened by the risk of pensions losing value in time. From a macroeconomic point of view, neither the capital collection, nor the pay as you go system is superior to the other when it comes to giving an answer to ageing.
As the only possible solution to the challenge above, the way to achieve long-term sustainability is to change approaches and radically transform the state-sponsored social security system. The redistribution between generations is well known in the pay-as-you-go systems: active generations finance the livelihoods of those already past that. However, the redistribution of the active generation is bidirectional: they sustain the already inactive, but they also do the not-yet-active as they raise their children. This transfer is not bound to institutions the way the state systems providing old-age pension are: we don’t keep a record of the amount we spend on our children the way we do about our pension contribution. Indeed, if there is a “social accord” to sustain our old parents, there should be one about our children as well. If we decided to hold an institutional record of the wealth transfer from the state and the parents toward the children (the way we have a record of student loans, for instance), not only could we have concrete figures about raising children, but we could also take a significant step towards establishing financial security in our old age as well.
The attached image is an AI-generated illustration.