Problems with pensions exhibit the same concerns that drive our inability to tackle the environmental crisis and other great societal issues. We need to recognise uncomfortable truths and meaningfully support collective, cooperative approaches, economist, Stuart Astill, warns.
Talk of a pensions crisis has not gone away. While there is some optimism there is also much uncertainty about the share of the pie that any pensioner may get when, at some increasingly distant point in the future, they can retire. This is a multifaceted problem underpinned by technical issues – in pensions and in the broader economic system – as well as socio-political problems.
Pensions are often naively seen from a narrow, financial perspective with little distinction between the micro, macro and human-societal issues. Discussion about reform often seems to suggest that, were all young people wise enough to stuff a funded-style pension pot full of a goodly share of their earnings, then they will have smoothed their income over a lifetime and mitigated the risk of a reduced standard of living in their retirement. And, if everyone did the same, this could be ticked off as a job done for individuals, for the economy and for society.
Putting money into a “pension pot” in this way – a so-called “funded pension” – is often seen as a blanket solution to everyone’s income problems in later life. But it is an uncertain strategy. The uncertainty arises largely from a shrinking number of people of working age who are producing the resources to support growing numbers of people who are retired and who will retire.
If the word support sounds odd, it is a technical point, not an emotional one. And it is not specific to pensions because it falls under what I call a Global Human Logic that says:
In our world there are only resources (including people) and decisions about how we use those resources and who benefits from the fruits of that use.
This logic is the ultimate constraint: people producing goods and services are supporting everyone who consumes. This so-called support ratio dwindles with the falling number of working-age people creating what is needed for the whole population to survive and enjoy life.
In the funded pension model each individual’s financial muscle, thanks to their pension pot, is set against all the other demands on productive capacity. If the support ratio indicates this capacity is decreasing you cannot guarantee yourself to be a winner.
This uncertainty of fiscal power at retirement is not discussed enough. In contrast, the alternative to the funded approach – the pay as you go (PAYG) scheme – is not only discussed, but is a lever of reform.
“Apart from smoothing income over an individual’s lifetime, pensions have an element of redistribution from some individuals to other individuals.”
In a PAYG scheme the money available for pensions in any given period depends on current workers paying into the same scheme, and they in their turn benefit, as the next generation of workers pays too. In this case the effect of the support ratio is clearer but not necessarily greater.
The constraint exists in both – we must not fall into the trap of seeing the obvious impact (in PAYG), but missing the hidden effect in funded pensions. Both approaches are dependent on a decent support ratio. Retired people in both models depend on others. Both models require others to be ready to support you.
In funded schemes, support is garnered by exercising the economic power derived from a pension pot, while PAYG depends on a social compact and the reciprocal rights and duties of scheme membership. Even if we are not consciously aware of such subtleties, we should all know that pensions are much more than individualised financial instruments. This is my first uncomfortable truth. My second is that, apart from smoothing income over an individual’s lifetime, pensions have an element of redistribution from some individuals to other individuals.
Public pensions and related support are usually redistributive. The rules of the scheme or policy determine the money that should be paid in during a working life against money that you may receive in retirement. This would typically be tipped towards redistribution down the income distribution – often by means of the setting of the relationship of contributions to benefits, and by floors and ceilings on them. But redistribution is not only found in public pensions.
“Retired people in both models depend on others. Both models require others to be ready to support you.”
The regulations around all pensions on, at least, fees, employer contributions and taxation also define some redistribution. The parameters effectively decide the shape of the split between:
- how much of your money goes to providing for your retirement;
- how much to the fund managers and their extended corporate entourages;
- how much an employer supports you in your quest for a good retirement; and
- how much is directed via taxation of one kind or another into the public purse, and then on to who-knows-where.
This is manifestly not necessarily redistribution down the income distribution.
None of this redistribution is, in and of itself, good or evil, but it is all redistribution and it is frequently misunderstood or overlooked. Protecting against poverty is perhaps an obvious element that few would disagree with (even if they debate the parameters). Poverty, though, is far from being the whole story.
We can all see that many pensions these days are not wholly secure and risks abound even for those who think themselves far from poverty. Getting a pound out from a pound put in feels uncertain. We may also feel somewhat nervous about the explosive risk of a bubble-laden economy where housing, credit and technology could collapse at any minute and the carbon economy has the choice between a managed decline or a spectacular unmanaged flop. This is amplified by the regular removal of astonishingly and consistently positive fund-management fees even when there is a notable negative return.
The redistributive element embedded in any of the ways of providing pensions is obscure. This is a problem in itself – but the obscurity also leads to this aspect of the pensions question being overlooked. In consequence, the identities of those who benefit in pension’ systems can become lost. And that lack of transparency reduces the ability of the least wealthy people to exercise any power within the system because working through a lack of clarity requires knowledge and costs time and money that is in short supply for people with the fewest resources
“None of this redistribution is, in and of itself, good or evil but it is all redistribution and it is frequently misunderstood or overlooked. ”
A good example of such equity concerns in pensions was raised by Frances Coppola in the June issue of The Mint where she discussed the highly gender sensitive / lifecycle aspects of pensions. It is true that productivity gains, of the type that Coppola rightly bemoans not seeing, can balance-off and loosen, to some extent, the available resource constraint. But our analysis is incomplete if we do not recognise the interplay of the size of the pot with the underpinning issue of distribution, or redistribution.
Yes, we can all save, work harder, be more innovative – but if the fruits of that are being surreptitiously siphoned off by the wealthy and powerful (whether they are working-age or retired) then the typical retired woman is going to see precious little change – even if the robots are working furiously.
Suppose we were to see the productivity gains from technology that we might expect if we believe the industry hype. Then “the wages of future workers should be more than enough to support a very large inactive population”, as Coppola suggests in her article. Theoretically true but not guaranteed to be anything more than theory for many. Unless we keep our eye on the redistributive ball the fruits of productivity increases may not find their way to the retired population – and even if they do it may well be to a small powerful subset.
The likelihood that women will get a fair deal is faint. The possibility that fund managers will be better off in the long run is perhaps certain. That those who get caught up in huge societal and economic changes will be deemed unlucky and left to suffer is all too likely.
It is the redistribution elements of pensions overlaid on the lifetime smoothing elements that determine the levelling of the playing field in pensions for women, as well as those unable to have a full working life and the merely unlucky. This latter group is growing as the system tends to concentrated larger gains for the luckier, fewer.
The issues that need tackling for all people to be financially and socially safe in retirement are the same as those needed to rescue the earth from eco-catastrophe and secure that future for our youth.
Naïve economic framing in a quasi-Darwinian battle is a seductive trap due to its simplicity, not its truth. Whether this battle is between generations – or between haves/have-nots in the environmental divvying-up of the earth’s resources. We must set our sights on a co-operative economic and social model with distributed political power that, iteratively, decouples power from wealth concentration and reduces the concentration of both power and wealth.
Speaking out about unavoidable constraints in the face of what looks like impressive reform is called pessimistic. Redistribution is often seen as a word that should not be spoken. But to get a fair and workable pension system we must speak loudly and clearly about these points.
And, if we can get this right for pensions, we may give ourselves a model for tackling problems of power and money elsewhere in a world where ill-considered application of insensitive free-market ideology has failed us.