Europe defends pensions at the expense of its children. Kotlikoff’s critique

“When it comes to pensions and budgetary reforms, politicians must behave like adults. And the first duty of an adult is to look after their children,” Laurence Kotlikoff tells Il Foglio. An economist and professor at Boston University, and a former member of the White House Council of Economic Advisers under President Reagan, Kotlikoff is one of the pioneers of generational accounting, which measures the impact of a state’s fiscal and budgetary choices on different generations. According to the economist, to assess a reform, it is not enough to ask what today’s pensioners stand to gain or lose; one must also look at the burden left for their children and grandchildren. Speaking of the young people who have taken to the streets in France to protest against the pension reform, he says: “They are protesting against someone who is trying to save their financial skin. Because if the retirement age isn’t raised, and if nothing else is done, they won’t have a pension.”

One of his latest works, produced in collaboration with the Bank of Italy and co-authored with Emanuele Dicarlo, Mauro Marè and Marco Olivari, offers a comparison between Italy and the United States that holds a surprise: in the long term, Italy’s public finances could prove to be less unbalanced than those of the US. The authors measure the fiscal gap: the imbalance, at current values, between future revenue and the resources required to service the debt and meet spending commitments already enshrined in existing legislation, such as pensions. The adjustment that needs to be implemented and maintained structurally to make the public finances sustainable – assuming a real discount rate of 2 per cent – amounts to 0.7 per cent of GDP for Italy and 4.3 per cent for the United States. “If Italy acts immediately, the effort required is much less than that of the United States. If it waits and leaves everything to future generations, the burden will be devastating and impossible to sustain.”

“Italy,” explains Kotlikoff, “has a smaller fiscal gap relative to its economy, but also a narrower future tax base, due to lower birth rates and slower growth in labour productivity. The United States has a larger imbalance, but also a much broader future tax base.” Under the scenarios favoured by the authors, passing the entire adjustment on to future generations would result in a net tax rate of around 104 per cent of earned income in both countries. “For every euro, for every dollar earned, they would have to pay 104 per cent to the government. Obviously, that is impossible.”

According to Kotlikoff, a possible solution that is fair to pensioners, workers and future generations is to act immediately: “By cutting benefits and other expenditure through permanent measures that do not force future generations to make further adjustments. Of course, the future is unknown, so these calculations must be redone every year to see whether the current policy holds up. But we cannot simply say: ‘We’re here now, and we’ll leave the heaviest burden to those who come after us.’ All generations must bear the same net tax burden, in proportion to their incomes, over the course of their lives.”

France is mired in a fiscal and social crisis; Italy appears to be no better off, and the same could soon be true of other advanced economies. Yet politicians seem to continue to shy away from tackling structural reforms, and the debate on pensions remains held hostage by a large section of today’s electorate. “Then they are acting immorally,” replies the economist. “I believe, however, that a party which places the moral duty between generations at the centre – towards those alive today, those who will grow up and those yet to be born – will have an advantage. Because voting to leave one’s children with a bill amounting to 104 per cent of their wages means choosing for them to go hungry, to leave the country or not to have children. This is what Meloni, Macron and the others need to be talking about, not just the retirement age.”

Which country best illustrates the cost of procrastination? “Argentina, without a doubt. A hundred years ago, it was among the world’s richest countries in terms of standard of living, and its decline was not due to a lack of ability on the part of Argentinians or a shortage of natural resources, but rather to one bad policy after another. The longer we put things off, the closer we get to some form of default.” Could AI help bridge the gap? Kotlikoff isn’t counting on it: “Since the Industrial Revolution, we’ve seen numerous innovations: railways, the car, electricity, the internet – and Argentina has adopted them all whilst its standard of living has been falling.”