Miscellaneous rants by a little old ladyJune 28th 2007
Miscellaneous rants by a little old ladyRecently I read a rant about pensions in the Daily Telegraph Money supplement of 23rd June. The main thesis of the writer (Ian Cowie) is that the whole UK National Insurance system is a scam equivalent to a pyramid scheme.
For the benefit of foreigners, let me explain that the scheme has never been formally funded. Instead, pensions and other benefits are paid for out of current contributions. Cowie argues (correctly) that this cannot work if the number of pensioners increases and the size of the working population decreases, as has been the case recently. The government know that too: that is why they are increasing the retirement age from 65 for men and 60 for women to 68 for everyone. Cowie is positively apoplectic about this. He calls it "so breathtakingly hypocritical it deserves a prize for shamelessness".
Why? There is nothing sacred about a retirement age of 65. The truth is that this figure was settled on because, at the time, it gave a suitable ratio between workers paying National Insurance contributions and retired people drawing pensions. As long as this ratio was maintained, the system was sustainable indefinitely. Now of course people are living for much longer because of advances in medical techniques and there are also many more of them because of the postwar baby boom. Also the widespread use of contraception and abortion in the '70s and '80s means that there are fewer young people around now to work and pay NI contributions. So the retirement age needs to be adjusted upwards.
I do not see why this should be called a scam. The scam is to pretend, as Cowie does, that a retirement age of 65 should be set in stone and that any attempt to change it is somehow immoral and dishonest, if not positively criminal. In fact it is precisely this fixed retirement age which has turned a once workable scheme into an unstable pyramid.
Cowie complains that if the retirement age is raised to 68, one in five men will not live to see retirement. Well, in the 1950s, that was also the case. And the remaining four fifths mostly died within a few years of claiming their pensions. That was what made the whole system work. The pension was called the "old age pension" in those days, and only those who reached old age were expected to benefit from it. It made sense to most people: the old were too frail to work but they had contributed a lifetime of work to society; therefore society had a duty to fund their old age. The idea that society also had a duty to fund 20-30 years of retirement for people who, for much of that period, were hale and hearty and quite capable of working for their living would have astounded Aneurin Bevan.
My generation will be the last to receive this unfair perk. Society can't afford it any more. And, to tell the truth, many of us feel uneasy with it. That's why there are so many retired people nowadays doing voluntary work. We feel we are too young to simply rust away and there is plenty of work that we can see needs to be done, so we roll up our sleeves and do it. I know I would be quite happy to be enrolled in some kind of Experience Corps and paid to do useful work.
Cowie's answer to the pensions crisis is for everyone to save for their own pension. It is better, he says, to have money of your own than to trust the government to keep its promise to provide for you. There are two problems with this approach. The first is that saving for a pension involves trusting some company (either your employer or a finance house) to keep its promise to pay out your pension when it falls due, and companies have proven in practice to be even more untrustworthy in such matters than the government. Too many people have paid into a company or private pension fund all their working lives, only to be told when they retire that their money has disappeared down a black hole and they will now have to survive on either a greatly reduced pension or none at all. It's not surprising that many young people now think that saving for a pension is a mug's game.
The second problem is even more fundamental. If everyone really saved enough money to fund a decent pension for a twenty-year-long retirement, so much money would have to be withdrawn from circulation that we would probably end up with a 1930s-style depression. Hardly a desirable outcome! The truth is that you can't solve a demographic problem by financial means. Demographic problems need to be solved by demographic means. If the ratio of workers to pensioners has gone awry, it must be rebalanced. And the only way to do that (short of killing off a lot of pensioners) is to raise the retirement age.
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