I am writing this during the university strike over amendments to the USS pension scheme. There are a number of things that are easy to say that are emotional in character rather than based on any understanding of the system and the way it operates. We also need to recognise that different economic assumptions influence the way that we view the issues in this dispute and to some extent, I would argue that what we are seeing is a conflict of economic principles.
We have workplace pensions because the government is seeking to offload some of the financial burden of paying pensions for an ageing community. This is based on a neoliberal principle of small state which leads to the idea that individuals need to prepare for their own future retirement. If we take the government at its word that the only possible ways to pay for the increasing pension bill are to
1) encourage / force people to save for their pensions (workplace pensions),
2) to increase taxes to cover the additional costs, or
3) to have people work longer (i.e. to an older age)
then we should look carefully at these options to decide which is the most appropriate to use.
Option 1 places the burden on the person who will supposedly benefit from the pension when or if they retire or on their employer to contribute to a suitable scheme. This places pressure on the employer to pay an adequate amount to cover pension savings while allowing the individual to live off their income. The current workplace pension scheme places the burden partially on the employer and partially on the employee. I would argue that regardless of the distribution between employer and employee, there is the same cost to the employer unless the employee has reduced spending power in the wider economy. Employers saying the cost of the pension scheme is too much and that the employee should be willing to risk their future income on the markets (the university proposal in the current dispute) just shows a lack of understanding of the employees position. As an employee, I do not want to spend forty hours slaving for an employer and then have to spend my evenings and weekends analysing the markets to obtain the best results for my pension savings. There is more to life than being constantly locked into financial issues. Unless you have some independent income or have a reasonable amount of control over what you do in the workplace, the employee becomes little more than a robot or an economic slave. They work to survive and to prepare for a future that they have no idea what it will deliver. A future that to a large extent is being moulded by government decisions.
If the pension is based on a defined benefit then it is expected that contributions plus the earnings from investment need to cover the future benefits paid out (assuming that a person’s contributions is what derives their pension). Leech (2017) argues that this is based in the assumption that the scheme could close. He also suggests that if the scheme remains open then the focus on the viability of the scheme should be based on cashflow (i.e. will current and future income including new contributions cover the required benefit pay outs?).
The defined benefit is estimated based on an assumed average earnings of the contributions. If the rate of earning falls below the assumed average earnings for any prolonged period of time then the pension scheme potentially has a deficit that may have to be made up by the guarantors of the scheme (for work place pensions then the guarantor is the employer so they carry the risk. Leech (2017) says that the scheme is backed by the Pension Protection Fund (PPF) which actually invalidates this assumption). This is the current situation with many workplace pension schemes having low earnings because of the financial crisis and government austerity. Employers are keen to reduce this risk by reducing the defined benefit or redefining the benefit to a defined contribution scheme.
Leech (2017) provides an analysis of the risks based on the assumption that the scheme could close and could therefore be in deficit at the time of closure, and of the risks based on the assumption that the scheme remains open and that future contributions and investment income have the potential to meet the defined benefit commitments. Leech concludes that the scheme is not in deficit but he also highlights the inaccuracy of the estimates being prepared by UUK and USS based on the basis of the scheme closing.
A defined contribution scheme works on the basis of what has been paid into the scheme plus the earnings from interest. For the employers, there is no risk but the employees take all the risk when they retire because they can never be sure what their potential pension will be or whether what is in their pension put has the capability of providing the required pension for the remainder of their life (life expectancy also being a guess). If an employee wants a better pension then they need to pay in more but that still offers no guarantees of a suitable pension for the remainder of their life.
Although not a direct comparison, this reminds me of some of what Michael Sandel (2012) says in “What money can’t buy.” Sandel describes schemes that are based on gambles (i.e. life insurances and futures trading). I see the workplace pension scheme in a closed form as a gamble either by employers or employees. There are no guarantees of future value of any investment. Any guaranteed pension has to be built on a different basis than the individuals contributions and returns on investment.
There is another element of this that I object to. It is the employee’s pension that is supposedly being brought as part of this work pension scheme but it is the employers who are dictating the scheme to which the employee belongs and the benefits that the employee gains from the scheme. Surely in a market economy (I do not believe a market driven economy is valid (see Thompson, 2018 and other entries in my blog)), the person who is purchasing the scheme should be the employees but that is not the case here. The employers are making the decisions based on their assessment of the affordability of the scheme. The employee is simply expected to accept the consequences of the decisions. If there is to be a workplace pension scheme then surely it is the employee that should be looking at the schemes on offer and their affordability to determine which they feel best satisfies their future needs.
However, there seems to be a bigger problem with these workplace pension schemes. In two recent company collapses (BHS and Carillion), it has been stated that there is a deficit in the pension fund. It is not clear how this evaluation was made so it could be on the basis of the fund closing (see Leech, 2017). Not only have the employers been managing the fund but they have either been undersubscribing to it or using funds from it for business purposes. The employees are not guaranteed a pension from such schemes but are sacrificing some of their incomes for ultimately no return. Possibly not surprisingly, the owners, senior managers, and pension fund managers do not seem to have lost out. They still have their expensive houses, cars, etc. It is the lower level workers who suffer the consequences both in terms of a lose of employment and lose of pension savings. Does this suggest there are some fundamental problems with the system. The universities are no different. They can afford the vice-chancellor salaries but not ensure that the people doing the real work have adequate security for the present or their future. Surely this has to be part of the mandate for any executive officer.
Add to this an emphasis on the desire for workplace mobility with a pension scheme that is linked to a workplace, and you wonder what the employee is actually obtaining from these schemes. In New Zealand, this was recognised as a problem with many employees finding that after transferring from one company to another they had gained nothing from their pension savings and in many cases lost their pension savings. The solution was to set up a national pension scheme that was available to all and was independent of the company you worked for. The employers still contributed along with the employee but at least there was no lose of savings and no risk of closure. However, such a scheme does not solve international employment mobility but that is a wider issue.
Option 2 places the burden on the current workers to pay for the pensions of those who have already retired. Leech’s (2017) argument for an open pension scheme also makes this assumption. This is based on a misunderstanding of money creation and government deficit. I am deliberately using deficit rather than debt since many economists say that it is acceptable for a government to run a deficit. These economists focus on the ratio of deficit to gross domestic product (GDP).
The usual argument in this situation is to focus on having to cover government expenditure by taxes but taxes is not the only source of government income. The government earns seigniorage for all cash (notes and coins) produced and distributed to banks. However, most money created is now created by banks when they issue loans or people use credit cards (Jackson, 2013; Jackson & Dyson, 2012; Jakab & Kumhof, 2015; Mcleay, Radia & Thomas, 2014) for which the government obtains no seigniorage. In effect, banks have taken over the responsibility for creating money and gain the advantage of charging interest to those who borrow. It should be noted that they also destroy money when loans are repaid.
The economic theory that drives the push to offload pensions is neoliberal in focus and seeks to minimise government services. There are other models that recognise that government should be working to meet the needs of its people and not the profits of large corporations. In this later focus, governments are prepared to tax the rich in order to feed the poor. Also consider the alternative of sustainable communities (see Thompson, 2017). There are also other economic models proposed including basic income models (see www.basic.income.org.uk). We are not necessarily tied to an economic vision that impoverishes large portions of the population and transfers the wealth to an increasingly small subset of the population (Neate, 2017).
Option 3 simply reduces the number who will be seeking to be paid a pension but it also assumes that those who have worked for forty or more years still have the drive to deliver the outputs demanded of them. Graeber (2018) argues that work becomes an end in itself. In effect extending the retirement age requires the creation of work and not the reduction in work hours that was expected with technological developments. In effect, we have not found a way of distributing the rewards of the economic system. It also requires the creation of money making schemes that amount to little more than gambles on future outcomes. Sandel (2012) discusses this idea in his book although not in relation to pensions.
We need to consider a different conceptual framework for the way that we interact economically. It would take more than this blog to deal with these economic alternatives.
Graeber, D. (2018) Bullshit Jobs: A theory. Penguin.
Jackson, A. (2013). Sovereign Money: Paving the way for a sustainable recovery. London: Positive Money.
Jackson, A., & Dyson, B. (2012). Modernising money: Why our monetary system is broken and how it can be fixed. London: Positive Money.
Jakab, Z., & Kumhof, M. (2015). Banks are not intermediaries of loanable funds - and why thus matters (Working Paper No. 529). Retrieved from http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf
Leech, D. (2017, 25 November) Is the USS really in crisis? Available from: https://henrytapper.com/2017/11/25/is-the-uss-really-in-crisis/
McLeay, M., Radia, A., & Thomas, R. (2014) Money in the modern economy. Retrieved from http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14
Neate, R. (2017, 14 Dec) World’s richest 0.1% have boosted their wealth by as much as the poorest half. Available from https://www.theguardian.com/inequality/2017/dec/14/world-richest-increased-wealth-same-amount-as-poorest-half
Sandel, M. J. (2012). What money can't buy: The moral limits of markets: Penguin Books Ltd.
Thompson, E. (2017) In or out of Europe? Available from http://kiwi-et.blogspot.co.uk/2017/05/in-or-our-of-europe.htmlThompson, E. (2018) Inequality and economic slavery. Available from http://kiwi-et.blogspot.co.uk/2018/01/inequality-and-economic-slavery.html