Pension policy, a lever for ecology?

While the reform of pensions and the reform of the ecological transition are being approached by the French government as two distinct issues, they could be more linked than it might seem. Economists Armel Ngami and Thomas Seegmuller look at the effect of a pay-as-you-go pension system, taking into account the evolution of capital and pollution, as well as the effectiveness of health and environmental policies.

After a year marked by the spectres of shortages and drought, in 2023, the government intends to reform the pension system, and the great ecological planning reform at the same time. However, pensions and the fight against pollution could be more linked than it might seem. Economists Armel Ngami and Thomas Seegmuller demonstrate how public pension systems could affect the evolution of capital, pollution and the effectiveness of health and environmental policies.

Growth, health and pollution: the infernal trio

A link between the health of individuals and economic development exists. A healthy worker is less likely to take sick leave and be more efficient, which is good for economic growth. Similarly, the promise of a healthy and therefore longer life makes individuals more likely to accumulate knowledge and skills, as they expect to live long enough to reap the future benefits of their investments. Therefore, by stimulating the accumulation of human capital1, increased longevity promotes economic development.

This could justify the upward trend in health care spending observed in the countries of the Organization for Economic Cooperation and Development (OECD). From 2.5% in 1970, it represented 6% of GDP on average in 20102, and could reach 9.5% in 20603. Furthermore, economic growth is associated with more tax revenue for the government, which means more money to build health facilities, fund medical research, and generally provide better health services. Therefore, greater longevity and economic development are mutually reinforcing.

• 1Le capital humain peut être défini      comme l’ensemble des capacités productives qu'un individu acquiert par accumulation de connaissances générales ou spécifiques, de savoir-faire, etc. 
• 2Marino, A., Morgan, D., Lorenzoni, L., & James, C. (2017). Future trends in health care expenditure : A modelling framework for cross-country forecasts. OCDE.
• 3de la Maisonneuve, C., & Oliveira Martins, J. (2013). A Projection Method for Public Health and Long-Term Care Expenditures (SSRN Scholarly Paper Nᵒ 2291541).

Photo par K. Mitch Hodge sur Unsplash

However, economic development is accompanied by human activities that generate waste that can be harmful to health. Pollution was responsible for one in six deaths worldwide in 20154, or 9 million premature deaths, over that period. This is three times the number of deaths attributed to AIDS, tuberculosis and malaria combined.

Another illustration of this harmful effect is China's economic growth in the early part of this century5, which was marked by only modest improvements in life expectancy - relative to the longevity gains in neighboring countries - because of its environmental degradation. During this period, an increase of 100 μg/m3  in the concentration of particulate matter in the air was associated with a 1.5-year decrease in life expectancy at birth. The Chinese case has allowed Natacha Raffin and Thomas Seegmuller to study the link between growth, pollution, and longevity. In a more polluted world, people will live shorter lives. If they expect to live shorter lives, this will have a negative impact on saving behaviour. This can have consequences at the macroeconomic level: if there is less saving, there is less money available to invest in physical capital and thus in production. Faced with this situation, they also analyze the effectiveness of investments in health policies, considered as curative, or pollution control policies, considered as preventive. Their conclusions show that in a developed economy, it seems more opportune to invest in environmental and prevention policies than in health policies.

In this new study, economists Armel Ngami and Thomas Seegmuller focus on the effects of pay-as-you-go pension schemes. In this system, we contribute directly to finance the pensions of the present, with a disincentive effect on savings which does not promote growth. With this additional mechanism, should we promote health or pollution reduction policies?

• 4Lundberg, O., Yngwe, M. A., Stjärne, M. K., Elstad, J. I., Ferrarini, T., Kangas, O., Norström, T., Palme, J., Fritzell, J., & NEWS Nordic Expert Group. (2008). The role of welfare state principles and generosity in social policy programmes for public health : An international comparative study. Lancet (London, England), 372(9650), 1633‑1640.
• 5Evans, M. F., & Smith, V. K. (2005). Do new health conditions support mortality–air pollution effects ? Journal of Environmental Economics and Management, 50(3), 496-518.

Pay-as-you-go pensions- a burden for environmental policies?

Pay-as-you-go pension systems are regularly called into question because of their financing and their impact on GDP. In France, the main concern is the ageing of the population, which would irreparably unbalance the financing of the system. The figures show that the age pyramid is changing: in the 1950s, there were five working people for every pensioner, but by 2040 there will be only two. Longevity has also increased and with it the time spent in retirement: from 15 years in 1950, this has increased to a current average of 26 years. However, the Conseil d'Orientation des Retraites notes that the situation is deteriorating, but without any real "financial danger"6. According to the organization, until 2027, pension spending will be relatively stable, rising from 13.8% of GDP in 2021 to 13.9% at the end of this five-year period. If financing is not the main issue, the pension system could have another, more surprising impact on the effectiveness of environmental and health policies.

• 6Marino, A., Morgan, D., Lorenzoni, L., & James, C. (2017). Future trends in health care expenditure : A modelling framework for cross-country forecasts. OCDE.

The researchers examined the effectiveness of health policies vis-à-vis environmental policies according to the level of pay-as-you-go pensions. According to their previous work, preventive policies, i.e. policies to combat pollution, are to be promoted in developed countries if the level of pay-as-you-go pensions is low: in this case, if environmental expenditure increases in relation to health expenditure, we are heading towards a more supportive long-term state in terms of growth compared to pollution.

However, above a certain threshold of the pay-as-you-go pension level, curative health expenditures would seem to be preferable. If environmental expenditure increases in relation to health expenditure, the opposite effect occurs: a less supporting state in the long term for an already developed economy, and a worsening situation for a less developed economy. In other words, if there is already significant redistribution through a health system, environmental policy is less effective according to the researchers' model. What may be surprising is that in an economy that is already developed and has a high social protection system in place, having a more pronounced environmental policy would not necessarily be favorable. A choice will have to be made.

A risk of generational conflict

In contrast to a pay-as-you-go system, funded pensions would not have much impact on overall savings and capital formation. It is a kind of forced savings plan that feeds into the financial markets, and it would then be pollution control policies that would prevail over health policies.

The CSA survey for the JDD of September 20227 on the concerns of the French public indicates something else: there are great disparities between generations: the environment is a concern for 36% of 25-34 year-olds, but only 18% of those aged 65 or more. According to Armel Ngami and Thomas Seegmuller's thesis, this gap could be accentuated by the choice of one retirement system or another. If the 25-34-year-old generation is still far from retirement, it might prefer a system that secures its nest egg and is more favorable to interventionist environmental policies: a funded system, which promotes savings and, through them, growth and the environmental policies that follow. On the other hand, the older generations might wish to keep a pay-as-you-go system for as long as possible, in which health care expenses would take priority over those related to the environment.

• 7Réchauffement climatique : Les fonds de pension toujours mauvais élèves. (2018, octobre 23). Les Echos

Photo par Shane Rounce sur Unsplash

While young people might see a system moving towards more capitalization as more beneficial for them and the environment, efforts will still need to be made on the side of financial actors to increase the effectiveness of environmental policies: in 2018, the 100 largest public pension funds invested less than 1% of their assets in the low-carbon transition, and barely 10% of funds had aligned their objectives with the Paris Agreement.