a Decent State Pension...
aspiration is to reverse the balance of pension provision from the current 60:40 ratio
between state and private funding. Though arbitrary, this target is based on the accepted
wisdom that funded pensions are superior to Pay As You Go (PAYG). Stakeholder
pensions were introduced to provide a new investment vehicle to help bridge the gap (at
least 2.5%GDP) between what we allocate from taxation and savings and what is needed to
afford a decent standard of living in retirement.
Since then, not only has the
availability of stakeholder pensions failed to stimulate additional saving but we have
seen the declining willingness of employers to provide good quality pensions because of
the collapse of the stock market and demographic pressures.
As it becomes clear that the
pensions gap is not going to be filled by increased voluntary saving, the Government has
reluctantly had to contemplate the option of compulsion. The reason for the reluctance is
clear - if the Government compels people to
contribute, it will have to take responsibility for the outcome. Making employer contributions compulsory carries
the risk that employers will simply compensate by cutting jobs or wages. Likewise, forced employee contributions will reduce
the disposable income of low earners but offer no guaranteed outcome. Worse still, from the Governments point of
view, compulsory contributions will be seen as a tax and will lead to questions about the
value for money of compulsory private pensions (which could mean compelling people to make
poor investments) compared with that of state provision from taxation.
Time then to re-consider the
assumption that the proportion of GDP to be paid out in state pensions must be held around
5% GDP because provision through PAYG is undesirable?
This is explored in a paper by
Christopher Downs published in a
recent Citizens Income newsletter (www.citizensincome.org).
The concept of funding for a social security programme is that assets must be accumulated
to match liabilities. This is justified in the case of a private scheme because of the
need to cater for the eventuality of failing to enroll new customers whilst still having
to pay benefits to its old customers. In
reality, the purpose of pensions is to allow people to carry forward consumption
possibilities. As individuals we may save to
buy financial assets but we are dependent on others to provide the goods and services we
need when we stop working or as Downs puts it (quoting Paul Samuelson), if Robinson
Crusoe were alone, he would die at the beginning of his retirement.
The only way real wealth is
transferred is to build physical infrastructure and human capital. Today, we are still benefiting from the investment
of the past, for example the sewers and bridges built by Victorians and the inventiveness
of educated people. Thus a PAYG system in which taxes on younger members of society pay
the pensions of older people can be justified on the basis of the past contributions to
society of older members. The costs of
organizing the system are also lower due to economies of scale and the fact that there are
no costs involved in persuading citizens to sign up to the scheme.
Of course the counter arguments
are that productive investment is not undertaken because of crowding out and labour is not
applied to produce useful output because of taxes on labour.
However, it can hardly be argued that private saving is being crowded out
and at the same time advocate
compulsory pensions savings. It is also a fact
that the Anglo-Saxon equity culture and extensive funding of private pension schemes are
actually associated with lower savings rates. As
John Kay pointed out in a recent article in the Financial Times, the main effect of
increased demand for equities has been to bid up prices, not create tangible assets that
will feed us in 2040. As for the need to
restrict taxes on labour, the advantage of PAYG is that there can be a wider tax base that
can include, for example environmental taxes.
Thus I would argue that we need
to challenge the notion that a decent state pension system is unaffordable. Confidence in
the state as future pension provider has been undermined by the propaganda that PAYG is
inefficient and saddles future generations with the costs of the present. But the recent
collapse of confidence in private provision should lead us to take a more balanced
approach between the risks of market failure and the political risks of relying on future
governments to honour the pensions promise.
Surely the trick here is to devise a universal system that everyone
understands so that state pensions cannot be cut without damaging political consequences?
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