Pension Schemes Are Eroding. What's the Solution?

Programs like subsidized child care, unemployment insurance, and public pension schemes exist to help those in need. But when money is tight, who gets priority? In The Perennials: The Megatrends Creating a Postgenerational Society, Wharton professor Mauro Guillén examines the issues plaguing different generations and how solutions for one generation may create problems for another. The following excerpt from his book zeroes in on retirement pension cuts and reform, challenging leaders to rethink disruptive strategies and plan for a more equitable future.

Learn more about the book by listening to Guillén’s Ripple Effect podcast episode, where he talks about closing the generation gap.

“This is causing me a lot of stress,” says Jan-Pieter Jansen, a seventy-seven-year-old Dutchman who retired at age sixty. “The cuts to my pension will mean thousands of euros less that I can spend on the family, and the holidays we like. I’m very angry that this is happening after I saved for so long.” After four decades of making contributions to his industry’s pension fund, he received a letter informing him of benefit cuts of up to 10 percent.

Longer life spans, combined with falling fertility, represent a formidable double whammy for pension systems, especially those funded through current contributions from employed workers and their employers. Furthermore, many public pension funds have assumed investment returns of 7 percent and above, which are unrealistic at a time when bond yields approach zero. The solutions? Virtually every serious study concludes that some combination of postponing retirement, raising worker and employer contributions and taxes, cutting benefits, or increasing immigration of younger workers is needed. Perhaps all of the above will be needed — which promises to be disruptive and painful. There’s a long list of prime ministers and presidents who have seen their popularity eroded over the looming pensions crisis. No politician wants to lose support among contributing workers or pensioners. Meanwhile, the interests are so entrenched that reforms needed to ensure the future viability of pensions seem unlikely.

Fortunately, people seem to be reading the writing on the wall and deciding to retire later. In the early 1970s, men retired at age 69 on average across the developed countries of Europe and North America, and women at age 65. The average age reached a minimum in 2000 at 63 and 61 years, respectively. Over the last two decades, both men and women have postponed retirement by 2.5 years on average.

I find it puzzling that most existing studies of the future viability of pension systems focus on the increase in life expectancy without taking into consideration average health spans. The concepts of both the life span and the health span are central to understanding the future of retirement in a postgenerational society because, when making decisions about retirement, people take into consideration not only how many years they may have left but also how healthy they are or are likely to be.

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I learned many useful things from my late Wharton School colleague Russell Ackoff, the pioneer of systems thinking. The most important lesson came from his eye-opening ninety-minute lecture about the famous London bus strikes of the 1950s. He was brought in by the London transport authorities as a consultant to help address the problem of delays during rush hour, when the number of red double-deckers in circulation exceeded the number of bus stops in the system, a situation that created many delays, as buses could not advance according to schedule. Each bus had a driver at the front and a conductor at the back who collected the fares. The problem was aggravated by the bitter struggles between the bus drivers’ and the fare collectors’ unions, the former counting many Pakistanis as members and the latter many Indians. (Mayor Sadiq Khan, first elected in 2016, is himself the son of a Pakistani-born London bus driver.) The drivers and fare collectors blamed each other on a daily basis for the constant delays and bottlenecks — the other side was simply not working fast and hard enough. The drivers would shout back at the collectors that they were slowing things down, and the latter would return the yelling. The verbal abuse made the situation far worse—and made riders very uncomfortable.

There are two ways of addressing any given problem, Russ calmly explained. One is to solve it. That means finding a way to overcome the immediate issue within the existing system design parameters and constraints. In the case of a major city’s rush-hour transportation woes, that might involve fine-tuning schedules, adding more bus lanes, anticipating traffic-light changes, directing passengers to less busy routes, or increasing fares during peak hour so as to discourage use. In a way, solving problems is like kicking the can down the road.

The other course of action, Russ would calmly propose, is to dissolve the problem altogether, to eradicate it. This second method consists of redefining the situation in such a way that the problem simply vanishes. In a brilliant stroke, he proposed to the London transit authorities that during rush hour, the fare collectors should not be riding on the back of the bus but standing at each bus stop. If one conductor were not enough for the busiest stops, two should be stationed. Not only would this dissipate the potential for conflict between drivers and fare collectors, but the process of loading passengers at each stop could be accelerated by several orders of magnitude. The problem thus simply went away. I vividly remember the executives attending his lecture at Wharton offering Russ, an octogenarian at the time, a standing ovation. He then proceeded to take questions, delighting the audience with his lucidity.

Solving the looming pensions crisis involves proverbial reforms that lack widespread support: raising the age of retirement, cutting benefits, increasing contributions and taxes, and opening the border to immigration by younger workers. Dissolving the pensions problem requires change at the level of the system — that is, departing from the sequential model of life, plain and simple. Replacing it with a fluid and reversible postgenerational model of life would liberate us from the problem once and for all, a possibility that we will explore later in The Perennials.