The Pension Debate: Malthus rides again
by George Hatjoullis
The pension debate seems to have concluded that because average life expectancy has increased there is a need for greater lifetime saving and a later retirement age. The notion that, in advanced societies with a steadily rising living standard, one should enjoy more leisure seems not to have found its way into the debate. The fact that this debate is taking place at a time of historically high youth unemployment has also managed to elude the debaters. The fact that increased life expectancy has not been matched by increased health in old age is also not apparently a consideration. The debate has a Malthusian smell to it.
Youth unemployment is being treated as a cyclical phenomenon. It is said to reflect growth at below potential. This is an assumption and not a logical one at that. The last 10 years have seen a dramatic change in technological development. The microchip and the internet are two innovations of great significance. It may take a while for the archaic system of data collection to capture the changes these are bringing. Productivity is improving. As a young man I worked on the counter in Sainsbury‘s. The till just recorded the money put in and taken out. The ability to do mental arithmetic was a requirement for getting my role. Today I scanned my own items in Sainsbury’s and left. It is a matter of time before all items are scanned at once in a basket. How many job roles will that eliminate? In factories, robot arms can assemble complex items. The arms are precise and never tire and never strike. There is a major productivity revolution taking place and it is displacing traditional job roles. Maybe the youth unemployment is not entirely cyclical. Maybe potential growth is higher than economists have grasped. The benefits of greater productivity can be taken as more leisure. This can be a shorter working week or a shorter working life. Working longer is quite counterintuitive. However, there is the matter of the how widely the benefits are distributed and through what medium.
One of the major growth areas in employment is in personal care, in particular of the growing elderly population. According to figures released before the G8 summit in London next week (http://bbc.in/1kdR3dD) dementia cases will treble worldwide by 2050. No doubt the problem will be proportionately greater in those countries with an ageing population. Dementia is a disease of age. Not easy to continue working if you have dementia. In fact not easy to continue living without good care. The demise of the extended family, especially in modern urbanised rich societies, means organised care is necessary. Dementia is a cruel disease and one that needs close care and attention. Plenty of scope to employ people. The problem is how does one pay for their services.
The idea that working longer is an easy solution to increased life expectancy may make sense to actuaries but is unrealistic. Longer life expectancy will bring with it health issues and make working longer not an option for many. The implicit assumption made by actuaries is that health will improve at the same rate as life expectancy. This is not evident and not an assumption we can rely upon. The other leg of the solution is to save more. This is at least logical but not consistent. If high youth unemployment has a cyclical element then an increase in the saving rate right now may not be that well-timed. However, the notion that private saving alone offers a solution is absurd. First, most cannot save more without reducing current expenditure to unacceptable levels. Second, many simply will not. What should we do with these people when they get old? Even if everyone was able save and did save exactly what they were told it would not necessarily solve the problem. There is a wealth illusion at work here.
If the pension crisis is resolved then people will work as long as they are able (or wish to if they have sufficient savings). Once retired ,whether owing to incapacity or choice, they need to have sufficient claims on GDP to meet their needs. These claims may be private claims through saving or public claims through rights accorded by the state system. Either way meeting the claims depends on GDP and this in turn depends upon the working population and productivity. The assumption here is that productivity will grow fast and that potential output will be able to meet all needs. However whether it does so or not depends on how the productivity gains are distributed. Indeed the productivity gains themselves are dependent upon distribution. The distribution of income and wealth is an integral part of the pension debate.
The present situation illustrates the problem. Many people now of pension age have saved considerable amounts, or at least amounts that they thought would be considerable when they started saving. At the time of retirement, their savings are looking inadequate. In part this reflects the recognition that life expectancy has increased though this is hardly a new phenomenon. However, it also reflects a deliberate strategy of negative real interest rates from the central banks. Pension savings are being redistributed to the indebted from those that have saved over their lifetimes. Rights to state redistributed income through care costs etc are also being reduced. It may not be lost on the young that saving is not a panacea unless you can save enough to embed an insurance premium into your wealth to allow for appropriation. For most this is not an option and may be a great disincentive to save at all.
The pension debate needs to go beyond working longer and more (private) saving. It needs to recognise that potential productivity changes are there but need to achieved and distributed widely. In particular, it needs to recognise that such productivity gains can be taken as more leisure and that this should be made possible. It needs to recognise that longevity does not necessarily increase in proportion to health and will bring new health demands. It recognise that the personal care sector can grow and is labour intensive and that its claim on future GDP will grow disproportionately. In short the pension debate is not an isolated problem that can generate its own solution but that the solution lies in a general framework that incorporates potential growth, income distribution, public and private goods and saving, and the meaning of society.