Rethink needed on pensions

Following recent pronouncements on pensions, Richard Murphy argues that economists and government advisers need to remember the fundamental principles that underpin retirement benefits.
 
It seems like no one knows how to solve the pension crisis. Lord Turner’s got it wrong on private sector pensions – forcing more people to save their money in Stock Exchange-based accounts that will simply fuel more speculative booms and busts whilst Lord Hutton wants to wreak similar havoc and place additional “savings” burdens on state sector employees who will now have to save more, pay for longer and retire on less.

No one can, of course, deny that there is a pension issue to be addressed. We are living longer. But unless we are to deny health care for the elderly, and support for those with infirmity, so bringing down the average age of death, we are going to have to acknowledge that an increasing number of people will live into old age, when many of them will be unable to work to earn a living.
 
It’s my assumption that we aren’t going to change our policy on health care for the elderly.  In that case, the old will be with us, and those in work are going to have to support them.  This is the macro-economic pension reality that we have to embrace.
 
But Turner, Hutton and almost all economists and commentators only seem able to take a micro-economic view of pension provision.  It is their belief that so long as we all put a sufficient pot of money aside then in our old age all will be well.  This is the basis for their demand that we all save more, now.  This demand is wrong.
 
The truth is that there is a fundamental pension contract in any society. This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors during their working lives which the following younger generation can then use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement.
 
Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.  That fundamental pension contract is not working in the UK right now, and that is why we have a pension crisis.
 
We have that crisis because we have concentrated on what I call the form of the pension contract, and not its underlying substance, which is what I note above.  The form of the contract is the saving arrangement on which everyone seems to concentrate when addressing this issue.  But there is a problem in that. The fundamental pension contract is not a savings cycle: it is an investment cycle.  The problem is, we confuse saving with investment.

Saving is putting money in the bank. Or it’s buying and speculating in second hand shares issued by companies many years ago and now quoted on a stock exchange. Or it’s dealing in land and second hand building. And it’s financing speculation, which simply seeks a financial return. They’re all saving. That’s fine but for one thing: none of them earn a real return. These activities do not directly, and many of them cannot indirectly, add value to society by creating gainful employment as a result of which they add to the sum lot of human capital or income. They merely reallocate that income and capital that already exists. And that’s not the same thing at all.

So the last thing we need is saving for pensions. That’s a complete mistake. Savings for pensions takes money out of the productive economy and deflates that economy as a consequence. Saving diverts resources from productive activity. It inflates the return to unproductive activity within the financial services sector. It reduces well-being. And saving can, by misallocating resources, reduce income and so reduce our capacity to pay pensions. Those are all things we’d best avoid.

What we want is investment in pensions. Investment is very different from saving. Investment creates new assets, tangible or intangible. Some tangible assets we can see and touch, and use in the long term. They include private sector assets such as plant and machinery, offices and IT, transport and agricultural equipment, power plants and recycling equipment. Intangibles can include inventions, copyrights and music. They also include education, training, and social infrastructure. This is spending money for a purpose, to achieve a goal, to increase income and to increase well-being and the support structures in society. All of which creates employment for people of working age - that then creates the wealth that supports people of retirement age.

We can afford pensions for the old in this country, now and in the future. But we can’t if we save for them. Saving removes our chance of meeting the needs of the old. The reality is that we can only meet the needs of those already in retirement and those who will retire if we invest for the future, now. And we can only meet those needs if that investment is wisely managed for the benefit of all. And I mean all. That means the state has a duty to direct that investment.

In practice this means three things. First it means pay as you go pensions  - such as those in the state sector are fine. And we don’t need people in that sector to pay more – we need more people working – in the state and private sectors. Then over all we pay more in total. So full employment is key to this.

Second it means we need an industrial strategy to make sure we invest wisely in the UK to provide for our future – and our retirements.

Last it means that a significant part of all money paid into pension schemes – I suggest 25% or £20 billion a year has to be invested in creating new investment that results in new employment opportunities. Only then will we generate the wealth to keep people in retirement.

Or to put it another way – we need to invest in our futures – and not save for them. They’re very different things.

Richard Murphy is director of Tax Research LLP. You can find out more about his ideas on pensions and tax issues via his Tax Research blog.