There is no pension crisis

Robert Henderson

The current pensions hysteria is a nonsense for three general reasons: it ignores the poverty of much of the population, the immense uncertainty surrounding future life spans and technological advances which will effect both production and care in old age, eg the increasingly rapid development of robotics which may well radically change the way in which we order work and the care of the infirm.

The latest official statistics on marketable wealth distribution
in Britain show the bottom 50 per cent of the population owning a mere
6
per cent of the national wealth. Moreover, the average wage is less
than £30,000 and a large proportion of the population earn fare less
than the average. Clearly, many cannot make and will not make any
meaningful private provision for their old age.

For those able to make private provision and those with company
pensions
the situation is worsening. Private pensions of all sorts are caught
in bind between offering an attractive package and lengthening
lifespans. Company schemes have already responded to this by rapidly
discontinuing final salary schemes. Public service employers are going
down the same root. The outlook for those with such pensions who will
be retiring in 30-40 years is less than enticing even if the pension
promises made now by private providers are met. Think Equitable Life.

More generally, it is impossible to forecast the economic
circumstances over a period of 40 years or more. Governments may
switch policies, wars may destroy assets, the international economic
balance of power may change.

All of this points to the need for continuing state provision as a
provider of the last resort. How is this to be done?

The value of actuarial calculations - the statistical analysis of risk
based on instances of the risk occurring - made sense for pension
calculations when life spans from generation to generation were
fairly stable. But, because of our ever increasing ability to cure and
prevent disease and to provide a more materially certain livelihood
for the majority, life expectancy in the future is no longer easily
predicted. Even if the wilder extremes of SF are avoided, it is
reasonable to assume a rise in life expectancy in the next forty years.
The rise does not have to be dramatic to make a nonsense of pension
provision made today - even a five year rise in the average would have
dramatic consequences for pension planning.

A substantial rise in the average lifespan does not necessarily imply
some major scientific breakthrough to slow or even reverse ageing.
All that would be required is for science to be able to reduce the
diseases which kill many before they reach the average age of death. In
other words, more people survive to the ages which now are the average
lifespans. It is quite conceivable that within the next 40 years
simply reducing early death could extend the average lifespan by ten
years.

More dramatically, it is conceivable that science may provide a means
to extend human lifespans beyond their current limits. Work on animals
such as mice have resulted in greatly extended lifespans simply by
restricting food intake from early in life. If human lifespans are
extended greatly, all pension bets are off. In such circumstances no
meaningful actuarial prediction for pensions could be made for the
odds would be that further, unforeseeable increases in life span would
occur continuously after the initial scientific breakthrough was
made. The fact that such scientific advances are possible in itself
makes current pension planning hideously uncertain.

What should we do as a society to plan for the future lives of the
old? First, let us assume that average lifespans are extended simply
through the diminution of early death rather than from any radical
scientific discovery, what then? If the average lifespan of Britons
rises to, say, 90, over the next 40 years, an obvious move would be to
delay retirement. But that raises a problem. Most people could
probably work to 70, but beyond that the incidence of ever increasing
non-fatal disease rises steeply. Keeping people alive longer does not
at present equal keeping them fitter. More 70+ year-olds means more
people suffering from various forms of dementia, crippling diseases
such as arthritis and people simply too physically weak to undertake
work which could provide an income to support them. Hence, extending
the retirement age, for both state and private pensions, is only a
partial answer unless science advances to massively reduce the
infirmities of old age.

It is also true that many people are really struggling to cope with
their job long before the current age of retirement. People in
manual jobs cannot be expected to work to 70 and those in heavy
manual jobs or those in jobs which require physical strength and
fitness such as grassroots policing, are probably past useful
employment by the age of 50, certainly by 55. In principle they can
retrain to lighter work, but in practice this is very difficult.
People who have spent their lives working with their hands in a
workshop or in the open air often do not take easily to working in an
office or shop. Moreover, the pay they will get from such "second
career" jobs is likely to be low, which is both a disincentive to work
and may leave the person unable o support themselves fully.

But even if a person can adapt to new ways or has been in the type
employment which can be carried on into old age throughout their
lives, the odds are that they will struggle to remain in employment as
they reach late middle age. Employers are prejudiced against the older
worker for various reasons. Part of that reason is financial, the
cost of employing them is high compared with a youngster, but it is
also in large part to do with the adaptability and energy of the young
compared with the old. In a time of ever increasing technological
change the natural resistance to change and learning becomes ever more
of a handicap than i was in he past - the problems most people over
forty have with programming their video is an emphatic example of
this.

However much we may like to persuade ourselves - and I write as a
budding wrinkly myself - that experience compensates for youthful
enthusiasm, the truth is that all of us become much less receptive to
new ideas as we get older, energy falls, physical strength fails, our
memory diminishes and concentration becomes harder. Consequently,
employers have good cause for employing younger people in most jobs.
Of course experience does count and in some jobs can be valuable well
into old age, but in most jobs it does not count for much after the age
of 60. Even in "people" related employment, which the older person is
supposedly better equipped to handle, experience may be a positive
disadvantage. For example, suppose an employer wants to employ someone
serving the public. It may well be that the average customer for the
business prefers to be served by someone young and employing the old
would be the kiss of death for the business.

The position of the older worker is being further undermined a present
by the high levels of immigration , both official and unofficial. Most
of this immigration is of the young, much of it young males. These
young workers will tend to take much of the work would otherwise be
available for the old.

Even in the most benign likely circumstances - an extension of the
average lifespan by five or ten years through the minimalising of
early death, it is clear that many people will require support for a
very long period of retirement or reduced employment. Some of that
may well come from private pensions and savings. But clearly for a very
large part of the population adequate private resources guaranteed to
support someone for 30 odd years will be beyond their grasp. Hence,
an adequate state pension for all is a must.

If great scientific advances are made which greatly extend life we
shall simply have to start planning again from scratch. Obviously if
average lifespan was increased to, say, 150, the whole perspective of
a life would have to change. There are any number of exciting or
disturbing possibilities. For example, it might be that only the newly
conceived or newborn children could have their lives increased by a
new treatment. We would then be in a position where that generation
and succeeding generations had the increased life span while anyone
born before the treatment became available lived to an average age of,
say, 90.

The other great concern about pensions is demographic. The
population is ageing and the birthrate is below replacement level -
the latest (2002) official figure for England and wales is 1.6 children
per woman. The doomsday scenario is insufficient working people to
pay the pensions of the old in the future. If we were talking about a
demographic change which was going to take place overnight I would be
worried. However, we are not. Rather, the demographic effects will be
worked out over thirty or forty years. Past experience suggests that
society will evolve to make the necessary arrangements. We cannot
foresee what the birthrate will be in five years let alone twenty or
thirty.

However, we should not put all of our eggs in basket. It would be
wise now for the Government to begin a state pension fund into which
one per cent of GDP (currently around £11 billion) was put each year.
This fund would not be touched for 20 years at least and would be
used to ease any future pension problem arising from a tax shortfall
due to a smaller working population.

The currently fashionable solution for the future pension bottleneck -
importing large numbers of young immigrants - would be no answer in
the long term. The young people who arrived in this generation would
eventually grow old and would need people of working age to support
them which would mean more immigration which would mean more old people
to support in the next generation and so on ad infinitum. In other
words, the problem would merely be delayed for a generation or two.