From Bismarck to Bankruptcy?

PRINCETON – Democracies find it hard to deal with inter-generational social transfers, and with pensions in particular. Like all such transfers, the demand for more security in old age produces a fierce clash of opposing interests. In favorable circumstances, those clashes are resolved by the promise and reality of economic growth. When times are bad, it is hard to provide a solution that is not based on deceit and lies.

The modern welfare state has a peculiar patron: Germany’s “Iron Chancellor,” Otto von Bismarck, who pushed through the big reforms of the 1880’s on sickness, accident, and old-age insurance against liberal parliamentary opponents. The motivation behind the reforms was avowedly cynical – to buy off labor protest, or, as he put it, to give the working class an interest in the state.

The reforms were the product of a state that was only partly democratic – and in large measure still authoritarian. Only someone in Bismarck’s position could shift social entitlements so decisively. For more accountable politicians, large-scale reform of social insurance – as the US has found in the case of healthcare reform – is immensely divisive.

Bismarckian old-age and invalidity insurance involved payment of a pension that was based on the beneficiary’s wage level and period of contributions. But, since it was payable at the age of 70 – an age that few workers reached – provision of it remained rather theoretical. The number of pensioners in the German scheme actually fell continuously until World War I. In a practice that anticipated the recent development of many European welfare states – most spectacularly in the Netherlands and Scandinavia – invalidity at a much lower age became a substitute for old-age pensions.