The origins of state pensions are to be found in market failure. States have intrinsic advantages over companies as pension providers: because they have the power to tax, and are around for a long time, they can count on those not yet born to pay for the pensions of those not yet retired. Today's contributions are used to pay today's retirees (a company that did this would be convicted of running a pyramid scheme). In nearly every country state pensions are funded not by general taxation but by a national insurance contribution, in effect a payroll tax. Pensions have become a right, and, in continental Europe, most people depend entirely on state-mandated pensions for their livelihood in retirement. Hence the massive demonstrations and strikes last year in France, Austria, Italy and Germany when changes to the system were proposed.

LRB 19 February 2004 | PDF Download