Just transition: the pensions analogy

A ‘just transition’ must replace fear of, and resistance to, brown job losses with consensus behind social investment. Pension reform provides parallels and pointers.

Any ‘just transition’ worth its name must square a circle along three dimensions: effective production, fair redistribution and political feasibility.

The productive puzzle is about finding the most relevant technology for the transition to get going. Will green energy be based on solar or wind? Should nuclear power be included? And any transition implies winners and losers, thus raising questions of redistribution. Should the public purse subsidise isolated housing or exempt electric cars from road tax? Allocating costs and gains also has a temporal aspect—the pace of withdrawing old technologies while feeding in the new.

The politics of a just transition is essentially about constructing consensus across these dimensions. Climate policy is thus increasingly framed as an investment strategy. The European Green Deal, adopted by the European Commission on January 14th, involves a Just Transition Fund to help coal regions phase out brown energies. An intertemporal offer par excellence—promising that short-term costs will be compensated by longer-term returns on investments, rather than allowing the wholesale destruction of human and social capital.

Salutary lesson

While intertemporal consensus-building is rapidly becoming the modus operandi in climate policy, a salutary lesson is provided by how this logic can hit the buffers when it comes to pension reform, as currently in France. The quest for productive solutions is easily trumped by distributive conflict between government clamouring for ‘fiscal consolidation’ and vocal opponents defending ‘social protection’ in the here and now.

One of the most successful feats of mid-20th century social engineering, pension innovation after World War II unmistakably followed in its time a ‘just transition’ logic in individual terms. Essentially, political consensus was reached to subtract part of the income of the working-age population to fund the pensions of those entering retirement.

The model allowed short-term costs on employees to be converted into long-term benefits for retirees, in the expectation that current workers would be treated likewise when they reached pension age. Effectively eradicating old-age poverty, this was highly effective from the 1950s to the 1980s, as the working population grew in size and productivity increases were realised through improved education for the baby-boom generation.

Already before the onslaught of the global financial crisis, however, the sustainability of inclusive pensions in Europe was in jeopardy. Today, ageing populations dampen employment and productivity, while ‘secular stagnation’ at low real interest rates makes it difficult for large pension funds to guarantee carefree old age.

Reasoning from a zero-sum perspective of static efficiency, closing the looming ‘pensions gap’ pushes governments to contract higher debt or reform pension parameters: increasing contributions, raising the retirement age, reducing benefits. This enflames mass protest.

Intertemporal perspective

To follow a just-transition logic, pension reforms should approach productive and distributive questions from an intertemporal perspective.

First, we need to raise the stakes of welfare as a productive factor. Keynesian-Beveridgean provision was considered barely to affect the capacity of the economy—at best, social security would stabilise aggregate demand over the cycle. In the neoclassical critique, social protection was claimed to distort the supply side via moral hazard, resulting in self-exacerbating unemployment.

Today, the evidence corroborates the contention that the quality of modern social policy positively affects long-term supply, especially with respect to employment and productivity, and indirectly demand. Central to the financial sustainability of the welfare state are the number (quantity) and productivity (quality) of current and future employees and taxpayers. Thus, to the extent that welfare in a knowledge economy is geared towards maximising employability and productivity, this helps bolster the sustainability of the welfare state, including of pensions, in ageing societies.

This requires a multi-dimensional ambit of policy interventions across the life course, from early child education and care, through lifelong education and training, active labour-market policies and work-life balance arrangements such as paid parental leave, flexible employment relations and work schedules, flexible retirement and long-term care. Such capacity-building social policies conjure up a ‘life-course multiplier’. The cycle initiates from early investments in children which may translate into better educational attainment and spill over into higher and more productive employment in the medium run. The latter, in turn, implies a larger tax base to sustain overall welfare commitments, such as pensions.

Seeing the pension predicament in terms of a productive problem to be managed in an intertemporal fashion, involving all age cohorts, requires a more inclusive coalition to support a truly paradigmatic welfare transition. Securing political compliance hence requires building dynamic governance arrangements, able to adjust policy in a process of social learning, with a strong commitment to fair and sustainable welfare from the young to the old—the bedrock of success of the European social model and of a greener future version. 

Lessons to draw

Lessons can be drawn from the pension-reform experiences in Finland and the Netherlands—also applicable to the ecological transition. A first is that reform sequencing matters.

Pensions are tightly connected to the labour market. Success in labour-market reform makes pension reform easier to swallow: workers who see labour-market conditions improve are more likely to support reforms than those who experience jobless growth. There is evidence that governments which have already enacted family and labour market reforms to facilitate life-course transitions find it easier to put pension reform on the political agenda as part of an inclusive, long-term ‘just transition’.

Finland provides a good example. In the 1990s, as the government wished to keep older workers in the workforce, various policy approaches were developed. These first concentrated on improving the occupational health, work ability and wellbeing of ageing workers. Reaping the fruits of these investments, Finland was able to follow suit in the early 2000s by giving employees the option of earning larger pensions than before, taking gender into consideration. This eventually allowed the government to postpone the age of retirement, thereby reducing the need for increased pension contributions without affecting the wellbeing of its elderly.

The Dutch lesson bears on mustering reform consensus, beyond party government, to include the constructive opposition and the social partners. In 2012, the Dutch government attempted to increase the retirement age from 65 to 67. The pension reform deeply divided the Dutch trade unions and reform progress on many other dimensions of welfare stalled. Over the long tenure of the centre-left coalition under Mark Rutte, the social partners were brought back to the table. Ultimately, the unions were able to make critical amendments, including special treatment for hard physical work as well as capacity-building incentives to lengthen working careers. A full pension accord was finally concluded between the subsequent centre-right Rutte administration and the social partners in June 2019, after a referendum of trade union members.

The overriding lesson from the constructive, lengthy and not always easy-going Dutch and Finnish pension-reform momentum is that success is more likely when it is an integral part of a productive, future-oriented welfare agenda. In both cases, the issue of the sustainability of pension commitments was not reduced to an isolated ‘older worker’ policy issue but became part of a more comprehensive reform strategy to develop a fully-fledged social-investment welfare state, from which future rewards would be reaped. Government and the social partners allowed each other to refine productive ideas for sustainable and fair distributive solutions through a process of joint problem-solving, which in turn strengthened mutual trust in the overriding effort.

As for France, from an intertemporal perspective the government has been unable or unwilling to widen the perspective on the fiscal sustainability of pensions toward a long-term endeavour of ‘saving pensions by investing in children and young families’, whose employment and productivity prospects essentially make up the carrying capacity of future pensions. The president, Emmanuel Macron, thus played into the hands of France’s most conservative unions, deepening the distributive decision-trap, which is bound to result in here-and-now mutual concessions, sure to further undermine younger cohorts’ ability to carry pensions in the future.

Months after the ‘yellow vests’ mobilised against Macron’s green-transition unfairness, a more comprehensive social-investment horizon could have inspired a more inclusive consensus and a stronger pension-reform coalition, thereby isolating the more self-serving unions who simply refuse to consider the long term.