00:00Renaud Foucault is Senior Lecturer in Economics at Lancaster University Management School.
00:05Renaud, long time no see. Thanks for coming back on the programme.
00:08OK, we've established the problem. Too many old people, not enough young people.
00:13What's the solution?
00:15Well, I think one of the things is to say what I think Merch is trying to do very seriously,
00:21to say the right thing is on the wall.
00:23In the future, demography has decided you will not get the same kind of replacement rates as your parents.
00:29So that's pretty clear. And I think this is one part of the move, which is to change the system and say,
00:34in an aging population, fertility rates are not improving.
00:38You need to switch a little bit of the pension system into capital markets.
00:44So Germany, France, most continental Europe don't have that tradition, but they have to grow this third pillar.
00:51But then the second part, which is something for the next 10, 15 years, is that at the very moment,
00:56these budgets are highly constrained in those countries because they have to pay for the baby boomers.
01:02And the baby boomers, they have been promised those replacement rights.
01:05So they've been promised by themselves somehow.
01:07Those are rules that have been written by baby boomers.
01:10But you need to decide whether you decide to pay all those commitments,
01:14so to continue to dedicate 20, 25, a third of the budget to pay public pensions
01:20for people who are going to have a long life expectancy, or if you decide to cut a little bit of pensions.
01:26Persuading people that change needs to be done there is very difficult, isn't it?
01:30The UK government recently tried overhauling benefits.
01:33It caused absolute uproar in the government's own party.
01:36No political party is going to risk losing support on pension reform, is it?
01:42And the UK is a good student for that, because the UK has the system where the state pension is very low.
01:48The UK state pension has this triple lock, so it's increasing faster than inflation.
01:52It is a burden in the sense that it will increase a bit too fast as the rest of the economy.
01:57But nonetheless, in the UK, most of the pension is something that people pay for themselves, they put on stocks.
02:03In the rest of Europe, you really have democracy and democracy indeed.
02:08In France, in Germany, elderly people vote much more.
02:11They are the ones with the means, they are the ones with the political power,
02:15and they have absolutely no interest in cutting their own benefits.
02:19Well, Germany's rather fragile government then, suggesting that Germans invest in the stock market.
02:24Why are people so reluctant to invest their pensions in the stock market?
02:30It's kind of a puzzle, because in Germany, if you look at the saving rates of Germany,
02:36and you compare that with the US, for instance, Germans are actually saving a lot of money.
02:41They are saving a lot of money, but they don't own their house, like, roughly 50% of them own their house.
02:46The rates are, they continue to rent.
02:48They don't put their money in stock, they put it on saving accounts, on bonds,
02:51or things that are seen as very safe.
02:54And maybe there is some kind of cultural tradition that the stock market is akin to gambling.
02:58And you see that also a lot in the rest of Europe.
03:02And so there is a need to show to people that over a span of 30 years, 40 years,
03:07the stock market is something that will give you, on average, a much higher return.
03:12If you don't do anything crazy, it is a good idea.
03:15It's also a good idea when the rest of the world is growing faster than your own economy.
03:19So Germany is a very rich country.
03:22There is absolutely no discussion that the level of, the kind of thing people can afford in Germany is high.
03:29But if they want to invest on growth, they need to invest in the rest of the world also,
03:34in countries that still have this possibility of growing at 5%, 7% a year.
03:40That will not happen to Germany in the coming years, and maybe never.
03:43Renaud Foucault, Senior Lecturer in Economics at Lancaster University Management School.
03:48Thank you very much.
03:49Thank you very much.
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