Last month the former head of the CBI, Adair Turner, presented his report to the government on future pension provision. It made for scary headlines. “Pension crisis looming for 12 million workers”, worried the Times (13 October). “Harsh truth is that we must save more or risk retiring in penury,” and went on:
“The root of the problem is increasing life expectancy and lower birth rates. By 2050, the proportion of British people over the age of 65 will increase from 28 percent today to 48 percent. This will leave Britain with dwindling numbers of taxpayers to support a massive retired population.”
Is this true? Will society be unable to cater for future pensioners at the same standard of living as they have today? Is there going to be a sort of class war between the generations, between those at work and those who have retired over how the national income should be divided between wages and pensions?
The short answer is: No. These are scare stories put around by employers, who want to reduce the contributions they pay into company pension schemes and the taxes they pay for state pensions, and by insurance companies, who want to sell more private pensions.
They've got one thing right though: in any society those who don’t work have to be maintained out of what is produced by those who do work. Everybody would agree that this is fair enough as far as people over a certain age are concerned, as well as for younger people who for one reason or another are unable to work.
But, in present-day, capitalist society there is another group of people who don’t work, and have to be maintained by those who do, namely, those who live off what used to be called “unearned income”, income in the forms of rents, interest and dividends derived from property ownership. That in fact is a good starting definition of a member of the capitalist class: someone owning sufficient profit-yielding assets to be able to live without having to work.
The source of all such unearned income (and indeed of the fat cat incomes of top directors, which is only unearned income disguised as earned income) is what Marx called the surplus value produced by wage and salary workers over and above what they are paid, which generally speaking corresponds to what they need to keep themselves fit to work at their particular trade or profession. It is out of this unpaid labour that not only the idle rich but the whole non-productive superstructure of capitalist society (the armed forces, civil service, legal system, banks, insurance and other money-handling activities) has to be maintained. What allows capitalism to maintain an enormous – and still growing – non-productive sector is the high level of productivity in the productive sector, a productivity which increases slowly but steadily all the time, historically at a rate of one to two percent a year.
Pensioners too are maintained out of this surplus but pensions are not a transfer payment from workers to pensioners, as the scare stories suggest; they are not paid for by ‘workers paying taxes’ since the burden of taxes paid by workers is in the end passed on via labour market forces to employers. Pensions are a transfer payment from the profits of the capitalists, even if ultimately these profits come from what workers produce. So, even if the ‘over-burdened pension system’ was to be reduced, this would not benefit the working population since the capitalist class would not dream of passing this on as higher wages and salaries.
Growth of pension schemes
One of the non-productive activities that the capitalist State has to undertake is the maintenance of the poor, those members of the working class who are unable to work and therefore have no income from a wage or salary paid by an employer: the sick, the handicapped, the unemployed and of course the old. This used to be done under what was called, appropriately enough, the Poor Law, which required local parishes to maintain the poor from within their boundaries. The fate of poor old people was the workhouse.
The history of the “Poor Law” is the gradual nationalisation of the system, accompanied by changes of name such as social insurance, national insurance, social security, national assistance, income support, pension credits, and the substitution of money payments for so-called “indoor relief” in a workhouse. By the turn of the last century, the authorities began to discover that so-called “outdoor relief” – a monetary payment – was actually cheaper than “indoor relief” and in 1909 stingy old age pensions were introduced for some workers aged 70 and over. This was financed by contributions from employers and workers and from general taxation and was baptised “social insurance”. It is still the basis of the State Old Age or Retirement pension in Britain today.
The level of the basic State pension has always been fixed as below the official poverty line, with the result that an increasing proportion of pensioners are on means-tested benefits to bring them up to the poverty line. As these top-up “pension credits” are tied to average earnings, the number of pensioners on means-tested benefits is expected to go up year by year. Turner – and the so-called “pensions industry” – are against this scheme as it discourages people from buying private top-up pensions (what they mean by “saving”) since most of any such pensions are deducted from the State's means-tested benefit.
To start with and until 1948, the State scheme only applied to a section of the working class, essentially manual workers in private industry. A different situation had evolved for people working for national and local government – so-called “superannuation” schemes (superannuation is just another word for pension), under which in return for contributions related to their salary, workers received a pension also related to their salary. These schemes were not funded, i.e. the money from contributions did not go into a fund that was invested, but went directly towards paying existing pensioners, a system known as “pay-as-you-go”. The logic was that funding was unnecessary since it would always be possible to find the money to pay pensions as governments don’t go bankrupt.
Superannuation schemes were also introduced, for office and supervisory staff, in the private sector. Eventually, these all came to be funded, to separate the money for pensions from the firm’s capital and so stop it being raided if the firm ran into cash flow problems or went bankrupt (a protection which has exactly not proved 100 percent efficient in recent years.)
A funded scheme means that contributions from members and their employers are paid into a fund which is then invested in government bonds or in shares or in property, and pensioners are paid out of the interest and capital gains on these. In recent years, with the slump in stock market prices, there have been capital losses rather than capital gains and these schemes have run into financial difficulties. Employers have been using this as a reason for cutting benefits, at least for new entrants. Increasingly, these are being forced into schemes which offer smaller and less secure pensions that are no longer related to wages or salary but purely to the amount invested and to the vagaries of the stock market.
A third type of pension arrangement is an entirely personal one where the pension payable depends on the contributions (and the income from investing them) of the individual person concerned. These are basically savings for retirement arrangements which also involve placing the money on the stock exchange and so have run into difficulties for the same reasons as funded pension schemes. They are the ones that are notoriously subject to so-called “mis-selling”.
Funded schemes are based on strict actuarial principles and have to be to remain financially viable in the sense of having enough money to be able to meet all their obligations to future as well as present pensioners. What actuaries do is to take statistics on life expectancy and a likely real interest rate over a long term to work out, given the pension benefits under the scheme, how much money needs to be paid into a pension fund to allow it to pay all the pension rights acquired at a particular time. Clearly, if people are living longer – as they are – that means pensions are going to be paid for longer, which means that the scheme is going to need more money to pay them. In actuarial terms, this means more money has to be paid into the scheme, i.e. contributions have to be increased.
In this sense, for funded schemes, the fact of people living longer does indeed mean that the pension contributions for working members have to increase. But actuaries have known for years about likely future population trends and pension schemes will have already taken this into account. What has caused the current financial problems for such schemes has been the unanticipated slump in stock exchange prices. This is mentioned by Turner but almost in passing, since he is all in favour of people’s pensions being dependent on the vagaries of the stock market.
One idea mooted by Turner to save money on pensions is for the normal pension age to be raised from 65 to 70. This of course would mean that pensions wouldn’t have to be paid for so long and, as the TUC has pointed out, no pension at all would have to be paid to those who die between 65 and 70, as one in five existing pensioners do (Times, 19 July).
The ghost of Malthus
But this problem only applies to invested, funded pension schemes and cannot be validly extended into a general social problem of “too many old people” or “people living too long” (even though it would be typical of capitalism to regard what is after all an improvement in the human condition as a problem). The fallacy is that the narrow financial criteria that apply to funded pension schemes don’t apply when it comes to considering the economy as a whole. Here the broad economic, rather than the narrow financial, position is what counts:
“Over the twentieth century the British population grew from about 36 million in 1900 to 56 million in 2000. People aged over 64 grew from about 1.8 million (five percent of the total population) to about 8.6 million (fifteen percent of the population). So the total number of mouths to feed and support rose by one-half, the proportion of elderly rose three times and the numbers of elderly rose nearly five fold. All these increases were dwarfed by the seven-fold rise in annual wealth production.”
And for the future:
“The long-term record of productivity growth alone undermines the claim of a demographic time bomb in the future. Even without any increase in the size of the active workforce, productivity growth at this long-run trend of about two percent a year means a near doubling of annual output over the next 40 years” (The Challenge of Longer Life: Economic burden or social opportunity?, Catalyst pamphlet, 2002, p. 28).
The “too many old people” doom merchants are making the same mistake as Malthus made two hundred years ago with his (completely wrong) predictions about “overpopulation”: they are ignoring that productivity also increases over time, so that whereas there are indeed proportionately less workers engaged in production they are able to produce proportionately more wealth. It is the increasing productivity that will go on between now and when existing workers retire that will mean that society, even capitalist society, will be able to support the expected increased proportion of retired people in the population. There is in principle no problem here.
So why the scare? Basically, because there’s a vested interest involved – the self-styled “pensions industry”. They want to reduce the State’s involvement in pension provision to paying a basic minimum pension so that they can themselves make money out of providing any pension over and above this. They’ve got their greedy eyes on the £57 billion a year “shortfall” mentioned by Turner and on the commissions they can make on this if the government forces both employers and employees to “save” this amount, or even a proportion of it, each year.
What in fact is ironic – or rather, it’s a bare-faced cheek – is that they are not an “industry”, i.e. not part of the productive sector, at all. They are part of the non-productive sector maintained, just as much as pensioners are, out of the surplus-value produced in the productive sector. Not one person working in insurance companies and other private companies engaged in pensions provision produces a single item of wealth. From an economic point of view they, too, are a burden on surplus value. But don’t expect any government report to point that out.
The real question facing workers is whether they should continue to support the whole non-productive superstructure of capitalist society when, if it were to go, along with capitalism itself, how we they going to survive in old age wouldn’t be a perpetual worry, since in socialism every member of society, including the old, would have free access, as a matter of right, to what they needed to live and enjoy life.
Adam Buick
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