Background - 27.04.2023 - 10:30 

Intergenerational contract: urgent action is now needed

Professor Martin Eling from the Institute of Insurance Economics (I.VW-HSG) has been grappling with the subject of intergenerational contracts for over ten years. "Switzerland would have all the conditions for a functioning social state. However, there is now an urgent need for action," he emphasised.
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Martin Eling from the Institute of Insurance Economics has been grappling with the subject of intergenerational contracts for over ten years.

Martin Eling is the Director of the Institute of Insurance Economics. Accordingly, he examines the intergenerational contract from a financial policy point of view. Ten years ago, the I.VW-HSG published the report "The intergenerational contract at risk: an analysis of the transfer from young to old in Switzerland." One of its key points was: the burden on the young will increase significantly in the coming decades against the background of demographic change. It considered the developments in the field of social insurance and environmental policy to be alarming. The conclusion drawn was that rapid action was required to prevent the intergenerational balance from becoming completely distorted.

A drop in the ocean at best

And what is the situation a decade later? "Very little has been done," was Martin Eling's sobering answer. The few reforms had at best been a drop in the bucket. The strain on the intergenerational contract between the young and the old has been continuing insidiously. "When the first social insurance policies were created, a number of workers financed one retired person, today it is three and in 2040 it will be only two. This cannot end well."

While the realisation that reforms are needed has matured, finding solutions that would also obtain a majority at the ballot box remains difficult, especially since the majority of the electorate today is already over 50. Another example for the difficult reform debates mentioned by the HSG professor is the discussion on raising the retirement age for women to 65. The argument for a "no" vote was the wage inequality between men and women. "There is very little advantage to mixing the two subjects with each other. Tackling each problem separately would be better." Social policy is always a redistributive policy; it is not a question of playing the generations off against each either.. "But the question of who will pay the bill at the end remains highly charged. And this is clearly the younger generation."

Several OECD countries are leading the way

If one considers the latest protests in France, is there any chance at all of raising the retirement age? "I would call France more of a special case. There are better examples where countries have responded to demographic change," stressed Martin Eling. Several OECD countries have already raised the retirement age to 67 or 68 or are in the process of doing so. In Denmark, for example, the retirement age is automatically adjusted when life expectancy changes. "If the retirement age is left at 65, we have to be aware of the consequences. The unavoidable result will be higher payroll deductions and higher taxes."

It struck him as absolutely grotesque that today men and women are retiring at 65 when they are still fully engaged in life. "Enormous potential is being wasted here. The older employees have valuable knowledge and a trove of experience that is lost upon their retirement." A large proportion of the newly retired are willing to work and to do something for the community. In the area of volunteering, the intergenerational contract still works very well today. Conversely, clear solutions are needed for employees in physically demanding occupations. 

Financing of nursing care costs even more contentious

Martin Eling sees the situation in the health care sector as even more problematic. The financing of the nursing care initiative, which was accepted at the ballot box in 2021, accentuated the precarious position. "If the situation arises where people can no longer afford their exploding health costs, the municipalities will have to step in. It would be fatal if they were one day forced to spend taxpayers' money to cover deficits in health care rather than on education."

But there are also glimmers of hope, according to the HSG professor. "The great thing about the situation in Switzerland is that it can afford a functioning social state. Consequently, the country would be well-advised to counteract the insidious processes." Apart from raising the retirement age, he names concrete measures, such as the introduction of an automatic debt ceiling for pension payments, incentives for the young and old to do voluntary work and better support for younger families. "Switzerland clearly lags behind many OECD countries in terms of extra-familial childcare. This could be another important adjustment lever for restoring balance to the intergenerational contract."

Looking for a new intergenerational contract

Doing nothing and letting things come to a head is the worst of all solutions, underlined Martin Eling in conclusion. Therefore, it is important that the generations engaged in a dialogue on reform options. This will also be the case on 4 and 5 May at the St.Gallen Symposium, which will again focus on the intergenerational balance, which has become lopsided. The 52nd edition of the major event with 100 speakers and 1000 participants from 100 countries will be primarily dedicated to finding a new intergenerational contract. In addition, it will discuss the question whether people could solve acute crises without causing long-term damage.

Claudia Schmid

Image: Adobe Stock / Allistair F/

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