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July 03, 2007
Stephen Pollard on the Ageing Population
Well, yes, it's an attractive argument:
What makes the sterility of the argument over public services all the more ridiculous is that none of this need be a problem. If, instead of using taxes to fund services on a “pay as you go” basis, we (to use the jargon) used funded financing, where money is invested throughout people’s working life, the demographic equation would be irrelevant.
By saving a fraction of our earnings each year, the weight of those repeated contributions to the principal, plus the interest earned on them, would accumulate by retirement to a capital sum sufficient to buy an annuity, or even a perpetual income, that would cover the pension and other costs of old age – including ill-health and chronic conditions such as heart disease and cancer.
But I'm not sure that it makes all that much sense. The problem is, as described, the change in the ratio between productive workers and the non-productive. Whether the money to pay for that second group comes from taxation of the first, or from dividends from the profits of their efforts, makes little difference to the fact that we have got this change in the ratio of the productive to the non-.
Yes, there are second order effects (the increased savings should mean greater investment and thus greater productivity of those future workers but that's a second order effect, if it even exists) but that doesn't solve the basic one.
Whatever money is to be used to pay for the services consumed by the non-productive has to be taken from the hides of the productive, whether it's interest, profits, dividends or tax.
The only possible manner of changing this (other than changing the demographics by importing lots of high breeding people: something that simply delays it all for a generation) is to cut the numbers of the non-productive in order to rebalance the ratio.
This means changing the retirement age. No, not by those three years currently in train, but much more radically. The system needs to go back to what it was, social insurance against the risk of outliving your savings. When the very idea of a universal old age pension was first brought in by Bismark it was set at the average life span. You could, in your 20s, rationally expect to live into your 60s. Half the population did, so you would (could or might perhaps) save for that scenario. But some, of course, lived much longer.
Thus the social insurance policy, of having the State provide the pension if you were lucky enough (?) to outlive what you had rationally saved for.
Thus the State pension age (what people do with their own lives and money is of course entirely up to them) should be raised to the average lifespan: some 77 for men and 79 for women. And if as and when life spans increase or decrease, then adjusted...as of course we don't know what's going to happen to the current cohort, we'll have to use the previous age cohort to measure this.
That's the extremely uncomfortable lesson from all of this: the current state pension age, even after adjustment, is at least a decade too low.
And as for all those lucky civil servants who retire at 60...sorry guys, we'd like another 17 years out of you, please.
July 3, 2007 in Economics | Permalink
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Comments
If the pension is funded privately via, say a SIPP, you can guarantee the money will be used for a pension. Currently, National Insurance is not ring fenced for pension use, so the temptation is always there for politicians to spend it for short term gain.
Posted by: Mike Davies | Jul 3, 2007 11:59:59 AM
"Temptation", Mike? In the sense of "guarantee", I suppose.
Posted by: dearieme | Jul 3, 2007 12:06:59 PM
The analysis in that piece is so poor it's frankly embarassing.
There are two ways in which funding can be of assistance, however. The first is direct hoarding of the goods and services that you desire in retiremet. Unless you want to live on tinned food, and take no holidays, etc, this is only really possible with housing. The second is to have investments abroad, which means the demographic issue is shared. How safe, however, having a large % of your investments in good-demographic countries is, will of course be the main point.
Posted by: Matthew | Jul 3, 2007 12:21:04 PM
Mike's argument is slightly irrelevant too, as we're not comparing funded private pensions with funded state pensions, but with unfunded state pensions (you can of course have unfunded private pensions too), and so what happens to 'the money' is of not much interest as long as you are aware it's not funded.
Posted by: Matthew | Jul 3, 2007 12:23:52 PM
It's obvious that there is an insurance aspect in any pension provision - we don't know exactly how long people will live past retirement. No one argues that people should live solely upon savings. However, it is not obvious why the government should be the provider of such insurance.
Steven is surely just arguing that contributions made during a working life should in theory pay for that individuals pension. Now clearly the increase in life expectancy will mean the ratio of contributing time to pension time has changed but this has little to do with demographics.
Government involvement in theory makes no difference provided the government actually put aside the contributions ready for later use. However, it did not do this. Consequently it now has to fund the immediate pension payments from current pension contributions. This is why demographics has become important. A shrinking group of the young (aided by immigrants) is paying the pensions of the old and as the boomers start to retire, the effect will become worse.
It's too late now, but consider the alternative. If the government had never entered the pensions arena, then people would have continued to contribute through private of work pension schemes. As it became apparent that life expectancy had increased then the pension companies would either raised their premiums or reduced the annual pension expectations. It is a always the case that governments are slow to respond to market stimuli and pensions is more proof.
Posted by: TDK | Jul 3, 2007 12:25:21 PM
"Steven is surely just arguing that contributions made during a working life should in theory pay for that individuals pension."
Well he says to do so would make demographics "irrelevant", by which he means the worker/retiree ratio, but that's just plain wrong, as demographic changes would affect the size of the pension and/or contributions.
He also wants this fund to pay for the NHS, so I think all he is really saying (but has no idea about the economics) is that he wants to see the savings ratio rise to 30% or so.
Posted by: Matthew | Jul 3, 2007 12:44:09 PM
I am not as convinced as Tim or Steven apparently are that we should entirely give up on the possibility of productivity improvements, which have been the main driver of economic growth for the last two hundred years or so. It is actually possible to have more leisure time as a result of technological progress - I even think Tim might have posted something about this once.
NB, Tim, that under your new economic scenario of no productivity growth (apart from the "marginal" effects of capital accumulation), future generations will *not* be much richer than us, so global warming becomes a much more urgent issue.
[As it became apparent that life expectancy had increased then the pension companies would either raised their premiums or reduced the annual pension expectations]
in other words, what is currently a potential and soluble problem would be an actual and insoluble problem? I fail to see how this would constitute an improvement.
[Currently, National Insurance is not ring fenced for pension use, so the temptation is always there for politicians to spend it for short term gain.]
Oddly enough, the idea of eliminating the state pension has not yet been regarded as a vote-winner by any political party, and I don't see how aging demographics is going to make this more likely rather than less.
Tim adds: I'm not trying to claim that there will not be productivity growth: just that whether we mick it off our grandchildren through the tax system of dividends makes no difference.
Further, you point about global warming makes no sense. The modesl (SRES and al that) already assumeincreasing productivity and income per capita (two sides of the same coin of course). So if that were not there then it would actually be less of a problem.
Posted by: dsquared | Jul 3, 2007 1:44:17 PM
Indeed, after Bismark, it was Adenauer who came up with the "generational contract" as a cheap way to win some votes prior to an election. When asked about demographics, he famously replied, "People will always have children". Now that Germany has one of the lowest birth rates ever recorded, the pressure on the retirement system has become so great that they have been forced to impose a draconian tax on fuel to prop it up. And just when you thought it couldn't get worse, it turns out that the state employees, do not pay into the system at all, they only take out and at a average retirement age much lower than non-state employees. With a huge demographic bulge of these state employees set to retire in the near future this finacial fiasko is so frightening that the body politic in Germany collectivly and steadfastly has refused to touch this topic with a barge pole. Still, someone is going to have to pay for it......EU taxes anybody????
Posted by: david | Jul 3, 2007 2:00:53 PM
[I'm not trying to claim that there will not be productivity growth]
well in that case your proposals for raising retirement ages are bizarre.
Tim adds: Why? So, there's rising productivity: but the change in demographics will mean that an ever increasing share of the economy will be spent on caring for the economically inactive. There's two possible solutions here: one is to take more (by either method) from those active to spend on the inactive or we can reduce the number of those inactive. My suggestion is that we do that latter.
Posted by: dsquared | Jul 3, 2007 2:50:09 PM
How is the country unable to afford paying a pension to pensioners between the age of 65 and 78, but it is able to afford paying a Citizen's Basic Income to every adult?
Posted by: Matthew | Jul 3, 2007 3:41:28 PM
Can't they retire at 20? At least that way they can't do any harm.
Posted by: fjfjfj | Jul 3, 2007 7:41:52 PM
Won't the 'aging population ' only be a problem for the next year or two. When the baby boomers are retiring there won't be a problem - there never is when votes are at stake.
People like me born in the thirties often notice adverse political activity as the birth rate was so low back then - so we have no political clout.
Posted by: john cramer | Jul 4, 2007 8:30:20 AM
"Yes, there are second order effects (the increased savings should mean greater investment and thus greater productivity of those future workers but that's a second order effect, if it even exists) but that doesn't solve the basic one."
The global savings glut is a "second order effect"? Ultimately, the ratio of contribution to pension depends on interest rates and expected lifespan as of retirement. If the rate of interest falls or lifespan increases, workers will have to save a larger fraction of their earnings in order to to pay for their retirement. It's that simple.
Posted by: guest | Jul 4, 2007 9:52:20 AM
Another aspect of the problem of a longer working life is that a great many employers will not employ older more experienced (more expensive) staff, and cannot wait to replace them with low waged immigrants.....
Posted by: Victor Meldrew | Jul 5, 2007 8:09:24 AM
