The Pension Crisis and the ‘Demographic Time Bomb’: Perceptions and Misperceptions in Great Britain and Germany at the Turn of the Millennium

Abstract

Abstract At the turn of the millennium, Germany and the United Kingdom experienced the most severe crises of their pension systems since the Second World War. In both cases, politicians reacted with extensive reforms. The political debates in each country revolved around the notion that demographic ageing was at the root of the crises. Hence, the call for greater intergenerational equity became the key justification of fundamental pension-system reform. But a comparative historical analysis reveals that it is a vast oversimplification to blame the pension crises entirely on demographic ageing. In fact, a combination of other factors—which varied widely between the UK and Germany—far overshadowed the ‘demographic time-bomb’ as the driving force behind the crises. A prime factor in the UK was the declining value of the Basic State Pension and the growing importance of means-tested benefits, along with the decline of company pension schemes. By contrast, the problems facing the pension system in Germany primarily arose from rising unemployment, the systematic early retirement of millions of eastern Germans and the high costs of German unity, which were largely borne by the social-security system. Furthermore, in the debate on Germany’s ability to remain a thriving centre for business and industry, rising pension contributions were widely held responsible for declining competitiveness. In both countries, politicians seized upon the explanatory model of demographic ageing because it made sweeping reforms of the pension system appear the consequence of a quasi-natural process, and created a welcome opportunity to divert attention from socio-political blunders.