The dangers of 'gray power' for senior citizens

Alberto Alesina and Francesco Giavazzi, Project Syndicate

With rare bipartisan agreement, the Bush administration is proposing a substantial increase in benefits for the elderly. The proposed reforms may cost U.S. taxpayers more than President Bush's massive tax cut of 2001, and one that implies a very significant redistribution from America's young to its old. But while many observers have pointed out the risks associated with Bush's tax cuts, and the gaping deficits that have followed, few seem worried about the added deficits that will arise from this gift to the old.

What is happening in America is but more evidence of the vast power exercised by the elderly in our societies. Similar moves are afoot throughout Europe, where the generosity of state- sponsored pension plans has become unsustainable, but reforming the system is almost impossible politically. The rise of pensioners' political power results from a multiplicity of factors.

The first is simply that in every industrial society, people are living longer lives and having fewer children. Combine this with the generous retirement rules that were designed in the 1970's, when the post-war baby-boomers were just about to join the labor market and the welfare state seemed to be free of budget constraints, and you create an entitlement that no one wants to tinker with.

The second factor empowering the pensioners' lobby is that the old are, on average, richer than the young, simply because they have been around longer and so have had more time to accumulate wealth. Being richer, they can provide more financial support to parties and politicians who will defend their interests than the young, who might want to push for pension reform.

Finally, pensioners have time in their hands, which they dedicate to organize political activities in their own interest. Two examples: Many trade union leaders in Italy are retirees, and retirees account for the largest proportion of the members of the most powerful and militant union, the CGIL. In the U.S., retirees tend to vote more than the young. Indeed, their power in America was perhaps best symbolized by the fact that a relatively few elderly men and women in Florida decided the last Presidential election!

All of this generates a vicious circle: The stronger the political power of pensioners and of older workers, the greater the pressure on government to shorten working lives and increase pension benefits. This in turn raises the share of voters who are dependent on pensions, and thus the political power of retirees.

In a recent article, Vincenzo Galasso and Paola Profeta from Bocconi university in Milan show that, in Italy, this nexus is now the major obstacle to pension reform. As time passes, the political support for reform dwindles, at least until the system blows up.

Another aspect that makes reforms difficult is that public pensions systems redistribute income from the rich to the poor because these systems are typically structured as "defined benefits" systems. Pensions are linked to final wages rather than to the actual contribution made by the worker over his or her lifetime. The extent of this redistribution varies from one country to another, but it is present throughout the OECD, including in the U.S.

Within the anti-reform coalition, those who favor redistribution, typically young and on the political left, thus often join retirees and older workers. The result is an extremely powerful political movement that extends from left to right, and includes young and old alike. The clear losers are young workers, and the future generations who will face the high tax burdens necessary to pay retirees their promised benefits.

The redistribution implicit in many pension systems is often far from "clean." Many systems entail politically motivated privileges for powerful lobbies. In Brazil, the pension plan of private sector workers runs a small surplus, but that of civil servants runs an enormous deficit, equivalent to of 4.5 percent of Brazil's GDP. French public-sector employees recently brought the country to a standstill when targeted by a reform whose main objective was rather modest: To bring their benefits into line with those in the private sector.

It is encouraging that the French government eventually prevailed, and interesting how this happened. After weeks of paralyzing strikes, Prime Minister Raffarin's government began a campaign to convince voters that the reform was simply removing the privileges of a small minority. The point sold well and civil servants found themselves isolated.

Of course, given the political risks, governments should not wait for confrontation with pensioners. Officials can take two obvious steps to avoid it altogether.

First, increase the age of retirement. This has two obvious benefits: It cuts the overall cost of the system by shrinking the number of retirees, and thus weakens the constituency that opposes reform.

Second, eliminate the redistribution implicit in the system. Any redistribution, indeed, should be transparent, and take place via taxation and non pension-related transfers. Of course, it is easy to understand why this does not happen: When redistribution is transparent, those who pay for it can complain. When redistribution takes place via the pension system, it is paid for by unborn generations, who have no voice in the next election.

In the meantime, one can only suggest to our grandparents that they compensate their grandchildren by leaving them generous private bequests along with high tax burdens.

Alberto Alesina is Professor of economics at Harvard University and Francesco Giavazzi is Professor of economics at Bocconi University, Milan.