The truth of the lies

One of the most heated debates in recent years worldwide has been pension reform. Until last week, in France, the mere raising of the retirement age by two years put the Macron government in a tight spot. 

The debate can be divided into two central issues. First, what form should the pension benefit take? The systems are divided into a benefit model derived from individual savings and contributions or a benefit model defined in advance and linked mostly to labor and demographic variables. The second issue is whether pensions should be, in whole or in part, an expense of the general state budget.

Although the pension issue is a technical-financial issue, its labor and economic implications have moved it to the great theater of politics. There, as is understandable, rational and objective arguments are confronted with ideological positions, lies and half-truths, which are very difficult to debate, particularly when the great audience, the worker or retiree, is very clear that he/she wants the most, putting as little as possible. 

Let us start by stating that the most bitter debate and where the most incredible fallacies are argued is in the defense of the misnamed "solidarity system". This system, known as "defined benefit" (DBB), has prevailed in all public pension programs for years. But this system, based on a forward-looking formula, rarely returned an economic return comparable to the pension, and how could it do so, if that number bore no relation to the history of returns on the investments in which the contributions were deposited? This system is and always was structurally deficient. As a historical reference, here in Panama, since 1981, the mismatch between contributions and pensions was shown.

Moreover, as the defined benefit variables are "man made" and therefore manipulable, the unions and politicians took care of making it more deficitary over time, increasing benefits and softening the demographic parameters. The system survives without showing cracks because being a system of collective savings, where everyone belongs to everyone, the current deficits were washed with the fresh contributions of those who were entering the system. As long as there were more new contributors than pensioners, the system took from one to give more to others.