Ageing Europe's Invisible Plight: Rising Income Inequality in Old Age Due to Employment Flexibilization and Pension Marketization

Pension reforms over the last two decades cut back public pension benefits, gradually extended the official retirement age, and fostered privately funded pensions. This marketization and privatization of income responsibility in old age has already important social consequence today and in the future. Moreover, the trend toward more flexible, if not precarious, employment has a negative impact on pension coverage and thus will affect old age income. While the sustainability of pension reforms in the face of demographic ageing has been widely discussed, the adequacy of retirement income has often been neglected from current debate, partly because poverty in old age seemed no pressing concern in advanced welfare states until recently. However, already in the past, poverty and income inequality varies across pension systems in Europe.

Comparison shows considerable variation across Europe when we analyze poverty rates at different levels. Using past and current EU-SILC, LIS and SHARE data, a comparative analysis of poverty rates in old age reveals that Beveridge basic security is not always capable of effectively reducing poverty despite the explicit purpose to do so, while some contributory Bismarckian systems are better suited to reduce poverty, despite focusing on status maintenance. The lowest poverty rates are found in the relatively generous Dutch and Nordic basic pension system. In contrast, Ireland, the United Kingdom and Switzerland with basic security and rather lean Bismarck-type systems have the highest poverty rates. Considering indicators of inequality, the elderly are more at risk than the working population with the exception of few Bismarck systems as well as the Dutch multipillar system. In the other countries, whether Beveridge multipillar systems, mixed systems of all Nordic countries or pure Bismarckian ones, the contributory public or private pensions lead to significant levels of inequality above the at risk-of-poverty line.  

The impact of multipillar systems on poverty and inequality in old age is rather mixed, suggesting that the effect of privatization depends not merely on the public-private mix but also on its design. To reduce severe poverty among those of retirement age, minimum income security, in particular sufficient basic, guaranteed or minimum pensions, are important. This will become even more crucial given the interrupted and non-standard employment careers of the current and future workforce. In addition, the earnings-related pensions are essential for maintaining living standards for most income groups. The Beveridge systems rely here alternatively on second-tier state pensions or on private occupational and personal pensions. While state pensions provide some redistributive features, in particular social credits for caring, private pensions rarely achieve social redistribution, unless tax subsidies, state regulation, or collective agreements intervene. Since pension benefits are the major income source for the majority of retirees, inequalities in old age derive largely from the design of the public-private pension mix.

Access conditions, contribution records, and benefit regulations are all crucial factors affecting the impact of marketized public and private pensions on income inequality in old age. Mandatory supplementary pensions as well as wide-spread collective agreements are important to increase coverage among current and future workers, particularly among those with flexible employment. Today’s rate of recipients depends on past efforts, thus only the mature multipillar systems have achieved a high and more equal distribution of private pension coverage with respect to gender, household type, and income group. Among current recipients, the public pillar still dominates in many Bismarckian systems, while the multipillar systems already have widespread supplementary pensions. Yet there are significant disparities with respect to gender, household, and income group: women, single pensioners, and low income households rely much more on public pensions than other social groups. In multipillar systems the highest income group profits most from retirement income via funded pensions. As a consequence, private pensions have become a major cause of the reproduction of market income inequalities in old age—at least above the level of public basic security. The Bismarckian systems, designed to maintain status, have reproduced inequalities from their early days, and recent reforms will reduce public benefits, leaving room for market-induced inequalities through voluntary private pensions, unless state or collective regulation succeeds in increasing coverage and socially redistributive elements.

Although public pensions, particularly in multipillar systems, have reduced the risk of poverty and the degree of inequality in old age, the different public-private mixes still entail a relatively similar overall reproduction of social inequalities. Individual pension income follows the pension system design: in the Bismarckian dominantly public systems due to the equivalence principle and in the multipillar systems via supplementary pensions. Moreover, as welfare states have been challenged by the financial and economic crises of the 2000s, individuals relying on funded pensions have also faced volatile financial risks and this individualization of risks may become even more imposing in the future. Only broad-based public policies and collectively negotiated self-regulation can pool risks and redistribute benefits to effectively counteract social inequalities in life expectancy. The comparison of European pension systems shows that the shift toward increasing privatization amplifies the already existing level of social inequality.

The potential increase in old age poverty for social risk groups is due to cutting back of public pension benefits, the insecurities of funded savings, and potential threat of unemployment among older workers. Hence, the public system (including social assistance) remains to be the main protector against old age poverty today but also in the future. Well-developed Beveridge and generous Bismarckian systems have been able to lower old age poverty thus far, but it may increase in the future, increasing political pressures to raise basic pension levels or provide guaranteed minimum income in earnings-related systems. The increased tightening of benefits to the employment relationship and contribution record in both public and private pensions will further lead to inequalities between those that have had advantageous employment and those with precarious jobs and new social risks. The retreat of the state may ironically increase the political pressures for its increased role in securing and regulating old age income provision in old age. The poverty and inequality among the elderly may thus require further adaptations by policy-makers and non-state actors.