It's not the size, it's the growth.
As the world ages, it's worth wondering if retiree benefits will increasingly drive inflation through supporting elderly buying power and enabling them to exit the labour supply.
Let's plot pension replacement rates, a measure of pension generosity, against 2023 inflation for the G20, the world's largest economies.
In short, countries' circumstances and systems are too diverse for a strong relationship between pension generosity and inflation, but let's break it down further.
Developing G20 Countries
They're a mixed bag.
High-Generosity/High-Inflation
I've left out Argentina and Turkey because their hyper-inflation is literally off the chart, but they unsurprisingly have very high replacement rates (86.9% and 91.6% respectively). Along with Brazil, they seem to support the argument that High Generosity = High Inflation. But their inflation is driven by other structural factors (currency, politics, public spending). Lavish pensions are not their biggest problem.
High-Generosity/Low-Inflation
Exceptions like China and Saudi Arabia do not really disprove the argument. In China's case, pension coverage is poor, and there are strong deflationary forces in play such as industrial over-production and a property crisis. Saudi Arabia's strong oil revenues allow it to insulate its citizens from price shocks.
Low-Generosity/Moderate-Inflation
South Africa and Indonesia have very low replacement rates (12 - 15%) but moderate inflation. Larger inflationary forces are at play, like volatility in currency, and food and energy prices.
In most emerging economies, other drivers of inflation overshadow pensions.
Developed G20 Countries
The effect of pensions on inflation is more apparent in the absence of other destabilising factors, such as in relatively stabler countries.
High-Generosity/Medium-Inflation
France, Germany, and Italy have fairly generous pensions but their inflation was more caused by the energy crisis following Russia's invasion of Ukraine.
Low-Generosity/Low-Inflation
Japan and South Korea. The elderly don't receive enough money to bid up prices, or in many cases, retire.
Medium-Generosity/High-Inflation
Anglophone countries (US, UK, Canada, Australia) experienced higher post-COVID inflation than would be expected given their moderate generosity, suggesting that perhaps a shared characteristic plays a part.
Indexation
Indeed, they are all automatically increased, or indexed, to maintain purchasing power. The US' Social Security and Canada's CPP/OAS are linked to inflation, The UK uses a "Triple Lock" to the highest of wages, prices, or 2.5%. While Australia's supplementary superannuation schemes are defined-contribution its Aged Pension is indexed to prices/wages.
Inflation plays out over time, and persistently indexed benefits schemes create a loop which enables recipients to keep consuming despite increasing prices. If the cure for high prices is high prices, indexed pensions protect a growing cohort from experiencing that remedy.
This becomes clearer when we look at the non-Anglo countries.
While France's pension is inflation-linked, the wider labour market has low levels of automatic wage indexation. Inflation doesn't spark a wage-price spiral or feed into pensions (though it may spark civil unrest).
Germany's pension indexation is calculated based on wages, which grew slower than prices during inflationary shocks.
Finally, Japan's Automatic Adjustment Mechanism (AAM) considers demographics as well as wages and prices to ensure already abstemious benefits do not rise as fast as prices, imposing a deflationary structure for the purpose of sustainability.
Conclusion
Pension generosity is not inherently inflationary.
Indexation (how much they ... inflate) is.
Indexation's political role is ostensibly to protect welfare recipients and greater society from destabilising inflation. However, it can be counterproductive, fueling the very inflation from which it aims to shield beneficiaries.
It's heartening to note that mere tweaks may defuse rich-world pensions from detonating benefit-price spirals. However, similarly minor proposals - such as raising France's retirement age and Australian superannuation reform - have met major protest.
Popular support for maintaining - or even expanding - indexation may itself have inflated out of our control.
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