Strategic policy directions for social policy

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Strategic policy directions for social policy

• Nicholas Barr
• London School of Economics
• http//econ.lse.ac.uk/staff/nb
• International Social Security Association,
• 5th International Research Conference on Social
  Security
• Social security and the labour market A
  mismatch?
• Warsaw, 5-7 March 2007

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Strategic policy directions for social policy

• 1 Social policy what has changed?
• 2 Universal benefits as a device for extending
  coverage
• 3 Later and more flexible retirement
• 4 Policies to assist parenting
• 5 Is there a mismatch between social security and
  the labour market?

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1 Social policy what has changed?
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The old assumptions

• Social policy after the Second World War was
  based on a series of assumptions
• Independent nation states
• A belief that the state had an important, and
  perhaps growing, role in assisting individual
  security
• Employment was a binary phenomenon, i.e. full
  time or zero
• Limited international mobility
• Stable nuclear family, mostly with male
  breadwinner
• Skills lifelong
• Constant age structure of the population
• Though not true even then, true enough to be a
  realistic basis for policy

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What has changed?

• Increasing international competition
• Changing nature of work, with more fluid labour
  markets
• Rising international mobility
• Changing nature of the family
• More fluid family structures
• Rising labour-market activity by women
• Shorter half-life of skills
• Demographic change
• These are matters of fact, not opinion

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Increasing international competition
(globalisation)

• More open trade and capital mobility
• Technological change, especially digital
• Result the capacity of state to provide
  individual security is put under stress (retreat
  to the core)

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Changing nature of work (post-industrialisation)

• Changes in the demand for skills
• Increasing demand for skills
• Declining demand for less-skilled workers
• Fewer full-time, long-term jobs
• Portfolio careers
• More part-time work and unstable jobs
• Resulting worries about a developing dual labour
  market

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Rising international mobility

• A major issue within the EU raises issues about
  transferability of benefit entitlements
• Also migration from poorer to richer countries
  raises issues of brain drain

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Changing nature of the family

• Postwar assumptions
• Husband the main (often the only) source of
  income
• Couples were married and stayed married thus,
  for example, a husbands pension covered his wife
• Most children were born in wedlock
• Today
• Many more marriages end in divorce
• Parenthood is less closely tied to marriage
• Many more women work
• Issues include
• Harmonising labour market activity and family
  formation
• Designing pensions in gender neutral way

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Shorter half-life of skills (the information
age)

• Technological advance has led to a situation
  where the labour force needs
• More education and training
• More diverse education and training
• Repeated education and training

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Demographic change

• Lower fertility
• Longer life expectancy

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Major implications

• More diverse patterns of work, creating
  difficulties in extending coverage
• Long-term, full-time jobs less frequent
• More part-time work, including multiple part-time
  jobs
• More work in the informal sector
• Demographic change has major implications for
  pensions and for labour markets
• Increasingly fluid family structures place
  greater emphasis on policies about parenting
• Increasing evidence on early child development
• Roles of full-time and part-time work

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Strategic policy directions

• Universal benefits as a device for extending
  coverage
• Later and more flexible retirement
• Policies to assist parenting

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2 Universal benefits as a device for extending
coverage

• The fact that a benefit has been contributory in
  the past does not necessarily mean that that is
  the right mechanism today
• The core argument is to align the choice of
  mechanism with the nature of coverage of each
  benefit

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2.1 The basic pension

• The objectives of pension system include
• Poverty relief
• Insurance
• Consumption smoothing
• Increasingly fluid work patterns suggest that the
  contributory principle for the basic pension,
  disability and widows pensions, is not as useful
  as previously, creating difficulties in extending
  coverage of the basic (poverty relief) pension
• Strategic question should the basic pension be
  universal?

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Arguments for contributory pensions

• Microeconomic an explicit representation of the
  insurance principle
• Macroeconomic augments tax base
• Political economy link to employment can help to
  maintain middle class support

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But

• Coverage can be incomplete, in particular for
  fragmented careers, women, self-employed,
  informal sector, and in the face of compliance
  problems
• The system can be regressive
• If the system requires many years of
  contributions to qualify for any pension
• A universal benefit may end up not being
  universal, i.e. goes to urban middle class but
  not to rural poor
• Administration may be costly or ineffective
• A false argument actuarial benefits
  significantly improve compliance

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Arguments for non-contributory basic pension

• Capable of near-universal coverage
• Contributory principle assumed workers with long,
  stable employment, thus coverage would grow.
  History has not sustained this argument
• Need a system fit-for-purpose in 21st century
• Adequacy
• Capable of offering significant poverty relief
  alongside the consumption smoothing and insurance
  purposes of pensions
• But low enough to be fiscally sustainable and to
  maintain incentives to contribute to the
  consumption smoothing element
• Broader social benefits, e.g. South Africa
• Some early evidence that contributes to family
  solidarity
• Can improve access to other services, e.g. health

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Arguments for non-contributory basic pension is
the system affordable?

• A universal basic pension can be adjusted to
  taxable capacity without an income test via
• The level of the pension
• Targeting devices such as
• Age
• Affluence test

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A basic pension designed to extend coverage and
improve incentives

• Non-contributory extends coverage, avoids
  regressivity
• Flat rate
• Earnings-related pensions require a contributory
  system
• Lack of means test improves incentives
• Perhaps with affluence test
• Awarded at age X
• X chosen in part to reflect fiscal sustainability
  
• X could rise slowly with life expectancy, e.g. by
  6 months for every year by which life expectancy
  increases

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Reform proposals in Chile

• For precisely these reasons, a Presidential
  Advisory Council in Chile, with whom I had the
  pleasure of working, proposed a tax-financed
  solidarity pension legislation is currently
  before Congress

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2.2 Areas where contributory benefits are useful

• Unemployment benefit
• Earnings-related pensions designed to provide
  consumption smoothing, i.e.
• A non-contributory basic pension plus
• A contributory second-tier pension

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3 Later and more flexible retirement

• There is neither an ageing problem, nor a
  pensions crisis
• People are living longer the great untold good
  news story
• Not a problem but a triumph
• However, creates problems of pension finance
• The solution pensionable age should rise in a
  rational way as life expectancy increases

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Roots of the problem of pension finance

• The ratio of pensioners to workers is increasing
• More pensioners
• More people live to retirement age
• People retire earlier
• Life expectancy at retirement is higher
• Fewer workers
• Declining birth rates
• Working life starts later because of longer
  education
• Finance is constrained
• Medical advances and the need for more education
  and training increase demands on tax revenues
• Global economic pressures make it harder to
  increase taxation

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The range of options

• The UK Pensions Commission (2004, 2005) rightly
  argues that there are four and only four ways to
  improve the finance of a pension system
• Lower pensions
• Higher public spending
• Higher saving
• Longer working lives

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Retirement later and more flexible

• A higher average retirement age
• To contain costs, making it possible to finance
  an adequate pension
• Phased in, rising in some sensible way with
  rising life expectancy
• Bottom line aim to increase labour-force
  participation at all ages
• A variable retirement age
• Desirable for its own sake
• Increased choice about when to retire, and
  whether fully or partially

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Towards an operational strategy

• An operational strategy requires changes both in
  pension design and labour-market institutions
• An initial retirement age that makes it possible
  to provide a genuinely adequate state pension
• A subsequent retirement age rising in line with
  life expectancy in a rational and transparent way
• Facilitating adjustments to pension design
• Facilitating adjustments to labour market
  institutions, allowing people to move from
  full-time work towards full retirement along a
  phased path of their choosing

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Pension impediments to longer working life

• Most schemes offer only a binary choice full
  pension or full deferral
• Pure final salary schemes creates disincentives
  to moving to part-time work

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Labour-market impediments to longer working life

• Any fixed costs of employment (e.g. health care
  in USA)
• Rigidities in labour markets
• Lack of clear legislative framework for
  downshifting for older workers, creating
  transactions costs
• Resulting difficulties in moving to part-time
  work or to a less stressful job at lower pay with
  existing employer
• Inadequate facilities for retraining older workers

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4 Policies to assist parenting

• The breakdown of the extended family and the
  decline in the numerical dominance of nuclear
  family, emphasises the importance of parenting
• Increasing evidence on the importance of early
  child development, e.g. Feinstein (2003)
• Again, a mutually reinforcing role for labour
  markets and social security

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Labour market assistance

• Institutions should facilitate options for
  part-time work
• Child care should be available (in terms of
  quantity and affordability) another part of the
  reforms in Chile is to include child care as a
  social security benefit

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Assistance from the benefit system

• Maternity benefits should support part-time work
• Sick leave should extend to situation where
  parent is well but child ill
• To avoid counter-productive effects, the costs of
  assisting parenting, whether on the labour-market
  or benefit side, should generally not fall on the
  employer

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5 Is there a mismatch between social security and
the labour market?

• Now, to answer the exam question the conference
  organisers set
• Mismatches exist in some areas policy changes
  can address them

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Where social security does not match
labour-market conditions

• Given current and prospective labour-market
  conditions, the contributory principle is less
  useful in some areas, notably a basic pension,
  than in the past
• Some pension institutions discourage longer
  working life
• Binary choice, i.e. walking over a cliff
• Some pension formulae, e.g. pure final salary
  schemes
• Child care/nursery education is increasingly
  important
• To facilitate labour market activity by women
• In the interests of early child development

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Where labour market institutions do not match
needs of social security

• Impediments to extended working life
• Fixed employment costs
• Labour-market rigidities
• Inadequate retraining for older workers
• Impediments to flexible working to increase
  compatibility between parenting and labour market
  activity

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The bottom line

• A greater role for universal basic pensions
• Policies that facilitate working life that
  reflects longer life expectancy
• Policies to facilitate parenting and foster early
  child development

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References

• Barr, Nicholas (2006), Pensions Overview of the
  Issues, Oxford Review of Economic Policy, Vol.
  22. No. 1, pp. 1-14.
• Barr, Nicholas and Diamond, Peter A. (2006), The
  Economics of Pensions, Oxford Review of Economic
  Policy, Vol. 22. No. 1, pp. 15-39.
• Barr, Nicholas and Diamond, Peter (forthcoming),
  Reforming Pensions Principles and Applications,
  OUP.
• Feinstein, Leon (2003), Inequality in the Early
  Cognitive Development of British Children in the
  1970 Cohort, Economica, 70/277, 73-98
• Chile Presidential Advisory Council (2006a), El
  Derecho a Una Vida Digna en la Vejez Hacia un
  Contrato Social con la Previsión en Chile
  Resumen Ejectutivo (The Right To a Dignified Old
  Age Towards a Welfare Social Contract in Chile
  Executive Summary), Santiago, downloadable from
  http//www.consejoreformaprevisional.cl/view/infor
  me.asp
• UK Pensions Commission (2004), Pensions
  Challenges and Choices The First Report of the
  Pensions Commission, London TSO, downloadable
  from http//www.pensionscommission.org.uk/publicat
  ions/2004/annrep/index.asp
• UK Pensions Commission (2005), A New Pension
  Settlement for the Twenty-First Century Second
  Report of the Pensions Commission, London TSO,
  2005, downloadable from http//www.pensionscommiss
  ion.org.uk