Pensions: The Life to Come

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Our future welfare depends on creating a radically different pension system, argues Robin Blackburn.

There is no other issue that takes us so quickly to the heart of the problems of today's welfare state and tomorrow's capitalism than the pensions crisis. This is because pension provision will soon be required to assure the livelihood of something like a fifth of the population for many decades ahead. The implications for capital are fundamental. After all, the capitalist disposes of today's economic assets and wages fund in order to be able to control the future flow of profits.

So with more people living for longer past retirement, capital faces a growing constraint. Either it finds some way of yoking the entire population to a commercialised pension system or it finds its own accumulation of investment capital circumscribed by growing public provision. This is part of a wider pattern whereby education and health costs are also commodified, and turned into a source of profit. In this brave new world of 'financialisation' the employee is already buying their future pension from a bank and health coverage from an insurance company, long before they have paid off their student loan. And the new approach is to make these payments compulsory. This generates new profits for the financial sector but undercuts social solidarity. It also happens to be a very costly and inefficient way of meeting social need. Commercial provision entails heavy expenses for marketing, admin and tailoring each financial 'product' to each purchaser. And there has to be a profit.

We live in a society where people spend longer in education and retirement and so the costs of educational and pension provision are growing. It helps to put pension costs in terms of shares of GDP. Let's concede that the retired don't need as much income as they did when they had the cost of raising a young family. But they will hope for about 70 percent of their former earnings if they are not to suffer a sharp drop in living standards. But if a fifth of the population need something close to 70 percent of their former average earnings then this requires 14 percent of GDP. At present the miserable state pension amounts to only 4 percent of GDP and private pensions struggle to supply a further 4 percent, so there is a yawning gap.

There is already a tight squeeze on many older people, especially older women who get by on an average of £92 a week each. Since pension income is almost as unequally distributed as other income there are many older women who are living on pensions of £3,000 a year or less. Don't be misled by the headline figure for the state pension since about a million older people, especially women, don't qualify for the 'full pension', miserable as it is, because they or their husbands didn't make the requisite contributions at some time in the past. About a half of these don't apply for means-tested help because it's complicated, intrusive and demeaning.

At the mercy of the stock market

These days the retired like to be active, to lead a social life, to contribute to family networks and to travel. That is why everyone should be able to look forward to a decent pension, enabling them to enjoy life and to help others, including children and grandchildren. Today the state pension is only about 15 percent of average earnings - the lowest of any advanced country and set to decline further since it is indexed to prices, not wages. Only half the population of those reaching retirement age have secondary coverage, and for many that coverage is inadequate and insecure.

Good occupational pension schemes are an endangered species. Private employers have been closing them by the thousand. They have replaced 'defined benefit' schemes, which supply a pension linked to previous earnings, with 'defined contribution' schemes which are at the mercy of the stock market. Employers used to contribute 12 or 15 percent of salary to such schemes - now it's 3 or 6 percent. Traditionally public sector workers had quite good 'defined benefit' schemes but these are also disappearing as privatisation spreads. The public sector schemes also sometimes face the problem that pension payments come out of the same budget as wages for current employees and services for the public.

Job mobility and insecurity further limit private occupational provision. If you were a member of a scheme for ten years in the 1970s and 1980s don't expect the pension to add up to much - it might be indexed to prices but not to earnings.

Since the 1980s there has been much official pressure to take out personal pension provision by buying one of the financial service industry's much-touted pension 'products'. Like other private schemes these are tax subsidised. But most of the subsidy - worth £18 billion a year - goes to the financial services industry because of their heavy charges. Over 40 years an annual charge of 1 percent reduces the size of your pension 'pot' by 20 percent, and a charge of 2 percent is quite normal.

There is wide agreement that the pension regime is grossly inadequate and that the basic state pension should be improved. But while they appear to agree on this, the CBI, the Conservative Party, the House of Lords, and the government's Pension Commission are exploring plans to raise the pensionable age to 70. Some would also like every employee to be compelled to join a commercial scheme.

Raising the pensionable age from 65 to 70 would significantly reduce state pension costs even if combined with a higher state pension past that age. The thinking behind the proposal - a species of 'implicit privatisation' - is that many would be scared by this move to take out private coverage. The shark-like financial services industry would be able to sink its teeth into an abundant shoal of new business.

Simple moral consideration

While people should be allowed to defer retirement if they want to, they should be able to do this without loss of pension rights. Raising the pensionable age would be an act of great injustice. Many working class people start work earlier, and have a lower life expectancy, than middle class and professional people - this means that they pay national insurance contributions for longer and yet receive less back in pension. The average life expectancy of a working class man is only a little over 70 years so, after a lifetime of contributions, he would receive next to nothing. This simple moral consideration should be enough to dismiss this idea but there is also a practical objection. Since it is already very difficult for many older workers to find a job, raising the pensionable age would simply condemn even more to unemployment. The hoped-for saving in public expenditure on pensions would be cancelled out by an increase in dole money.

Instead of the proposed degradation of pension promises, everyone aged 65 or over should receive a basic pension of at least £110 a week and it should be indexed to earnings. There should also be secondary coverage for all, mainly to be financed by a restoration of the vanishing 'employer's contribution'. The TUC has rightly called for all employers to be compelled to pay for pension provision but has been sketchy about the details.

Today's private sector 'defined benefit' schemes suffer from the fact that it is the individual employer who guarantees the future pension - yet that employer could be out of business by the time the employee reaches retirement. The government is trying to set up an insurance scheme but the resources needed to make this work are lacking.

It would be much better to compel all employers to contribute to a national multi-employer scheme covering everyone. This was the approach of one of the architects of the modern welfare state, Rudolf Meidner, who was chief economist to the Swedish trade unions from the 1950s to the 1980s. A refugee from Nazi Germany who was much influenced by Rudolf Hilferding, Meidner proposed that the problems of the ageing society could be anticipated by setting up 'wage-earner funds', a network of social funds which would be financed by a levy on the shares of corporations. The corporations should be obliged to issue new shares every year to these funds equivalent to 10 percent or 20 percent of their profits. This would be a free of charge donation. The regional social funds, run by elected officials, would not be allowed to sell the shares but would hold them to help cover future pension needs.

Unlike corporation tax this levy would not subtract from cash flow, and thus would not encroach on investment and employment, as corporate pension contributions often do now. However, over time it would build up a very sizeable fund, with a significant annual income. The social funds would be able to shore up threatened occupational schemes and offer a layer of provision over and above the basic pension to all, including carers, the unemployed and those with no private coverage.

The share levy is not a free lunch, of course, but is paid for by existing shareholders who would suffer a small dilution of the value of their existing holdings, roughly a 1 percent dilution a year if the levy was set at 10 percent of profits. Steps would be taken to ensure that all pension funds would gain more than they lose through the levy. Currently about 15 percent of all UK shares are held by pension funds, and thus would qualify for a top-up.

Meidner's scheme was designed partly to address a looming crisis of social expenditure and partly to boost the power of the labour movement. I have calculated elsewhere that a levy set at 10 percent of profits would be worth about £1 trillion in 30 years time and would generate £40 billion annually.* The funds would also, through their own elected officials and professional staff, be able to monitor the corporations. They would have a strong interest in combating corporate tax evasion, and in ensuring that employee rights were respected, and could use their growing stake to make their influence felt as the better public sector schemes are already beginning to do.

Meidner knew that 'wage-earner funds' were a limited measure. They don't abolish capitalism but, like trade unions, they could be a means to promote the political economy of labour. While it would still be necessary to ensure a decent basic state pension, the new funds would furnish an extra, universal layer of provision. In two ways the share levy would help to promote 'de-commodification' - firstly, by replacing the need to purchase pension coverage from a commercial supplier, and secondly, by removing a growing slice of share ownership from the play of market forces. Moreover the share levy would begin to redistribute assets towards working people (if you like, 'expropriating the expropriators') and to set up a collective means - the network of social funds, to assert their claim to the shape of the future.

Robin Blackburn teaches at the University of Essex and is the author of Banking on Death, or Investing in Life: the History and Future of Pensions, published by Verso.
* I elaborate details on all this in my book Banking on Death (Verso 2002) and in an article on how to rescue the failing British pension system in New Political Economy, December 2004.