Few topics are as discussed at Davos as “inequality.” Business leaders and bankers take a great interest in debating how to ensure that globalization works for the many and not just for the few. This isn't pure altruism, of course: They understand that a populist backlash could be devastating for their businesses too. These conversations too often fail to specify what kind of inequality governments ought to address. Bloomberg reports in its article Europe's Youth Have Good Reason to Be Mad that few mention that global inequality has fallen consistently over the last three decades, thanks to the rise of emerging markets, and China in particular.
A recent study by the World Bank has also shown that twice as many countries saw inequality decrease than increase. These findings mean that we need to be a lot more precise about inequality if we want governments and businesses to take the right kind of action to address it. The International Monetary Fund therefore deserves praise for a study about inequality in Europe which was launched at Davos on Wednesday. Rather than talking about disparities generally, the Fund chose to concentrate this particular report on inequalities between generations. It’s hard to see EU countries becoming fairer unless they rebalance their tax spending priorities away from the oldies and toward the young.
The IMF report starts from a stark finding: Income inequality in the EU27 -- usually represented by a measure known as the Gini coefficient -- has remained broadly stable over the last 10 years. In contrast, generational inequality has risen sharply: The share of over-65s and people aged 18 to 24 at risk of poverty was roughly the same in 2005 at around 20 percent. Since then, it has fallen to around 15 percent for the senior, and risen to nearly 25 percent for the young.
This finding shows that the European social safety net has done a very good job at protecting pensioners during the crisis. However, it has failed to support those who went through an era of high unemployment and wage stagnation. As Christine Lagarde, IMF managing director, put it, “Without action, a generation may never be able to recover.”
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The IMF has a long list of measures which could potentially help younger generations. These range from cutting taxes and social security contribution for younger workers, particularly those who earn less, to spending more on education and training. Some of these proposals are also rather ambitious: For example, the IMF says countries could lift wealth taxes. Since the oldies typically hold more assets, which they have accumulated throughout their working lives, this is a way to ensure the tax burden falls more heavily on them, while minimizing the risk of discouraging work. Still, the IMF is less radical than it could be. The report addresses the importance of redirecting social spending towards benefits for those of working age, which can help those who face a spell of unemployment or precarious work. As the report notes, 60 percent of the increase in social spending in the EU since the crisis has been directed at old-age benefits.
However, the IMF falls short of demanding that governments reduce excessive pension benefits, when they are much higher than the contributions a worker has paid in. In her presentation at Davos, Lagarde preferred to talk about the need to make pension systems more sustainable, for example raising the retirement age together with life expectancy. But since governments typically only introduce a pension reform after a long transition period, these changes could end up placing the weight of the adjustment – once again – on today’s youth.
Of course, asking pensioners to accept less will not be easy. Across Europe, older voters tend to turn up to the polls in greater numbers than their juniors. And since in several instances, younger voters favor anti-establishment parties such as the Five Star Movement in Italy, mainstream forces may have even fewer incentives to act.
Still, if EU governments are serious about addressing inequality, they must address youth poverty and exclusion. Concentrating on the wrong kind of disparity is like ignoring the issue completely.
