The future of…

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The future of pensions

Futurists highlighted the pensions problem decades ago but society as a whole didn't really notice the demographic changes that would bring about today's pension crisis until a few years ago. Even now, public awareness only reaches the most superficial layers of the problems we may face.

I suggested several years ago that young people would not put up indefinitely with subsidising generous pensions for older people if they won't benefit equally themselves. However, it has taken some time for this prediction to come true. As I write this, it was only last week that the first reports of a minor rebellion by young people appeared in the papers. This is a weak signal of a possibly very strong trend. Soon, there could be mass demonstrations by young people protesting against high taxes and national insurance to pay other people's pensions, when they themselves are expected to fully fund their own. Recent tax changes mean that they will have to pay more of their income to get a given level of benefit themselves. And while they see people taking index linked pensions and early retirement at 50 all around them, young people are being told that they will have to work to 65 or even 70 before they can retire on much less generous incomes.

Their predecessors voted for (or at least accepted) generous benefits, but most put far too little in to pay for them, so the balance has to be paid by subsequent generations, who of course had no say when the benefits were agreed. There was presumably no intention to defraud future generations, just widespread lack of government and actuarial competence, which seemed to assume that everyone would go on dying a couple of years after retirement in spite of obviously improving medical technology.

Nonetheless, this asymmetry of contribution and reward will be seen by many as unjust, and is likely to cause strong conflict between the young and the old. It is not easy to justify the rights of one generation to award themselves income at the expense of their children and grandchildren (though it can certainly be done). With pensioners making even greater demands on free health care over their extended lives, the social tension can only increase. The inter-generational debt could become too high. We could have a society where old people are seen as parasites that cause high taxes and clog up the country instead of doing the respectable thing and dying off. Wealthy pensioners might suffer particular resentment.

This problem affects the whole of today's developed world. However, much of the developing world will be fully developed within a couple of decades, but with a much younger population. With few retired people for the workers to support, tax rates could be relatively low, making it attractive for people to move from high tax countries. With the right credentials to squeeze through their presumed immigration controls, many of our brightest and best young people will leave, reducing our national competitiveness. Europe, the USA and Japan could be left as uncompetitive retirement homes, with even fewer young people to pay the pensions.

Pension funds also own a great many of the shares in our companies. They will have to sell these in due course to pay for the deficits between income and expenditure, especially if emigration reduces the amount of taxable income. With a lot of selling, but few pension funds in a position to buy, share prices would undoubtedly fall, further decreasing the value of the pension funds and making the problem even worse. We will have higher demands, but less money available. Funds that go under would leave even more people at the mercy of the taxpayer.

However, it may not be that bad. Several other trends work in the opposite direction. Demographic changes in the next few decades include a lot of immigration, which will help re-balance the ratio of young and old in the UK and some other European countries. Technology change over this timeframe will greatly reduce the basic cost of living by increased automation in production, so that poverty may be much less of a problem, reducing the potential social tension. Economic growth will continue for many years, so we may well be in a position where pensions can be paid without greatly increased taxes. Most people will be happy to work longer if they are in good health, so increasing retirement age might be a welcome alternative to having millions of bored old couch potatoes who feel prematurely discarded. And finally, changes in the underlying economy will take us from one that depends on agility and speed to one that relies on interpersonal skills. These tend to increase as we get older, so we may find that the job market actually favours older people.

The phasing and relative strength of these trends is different, so we may still have a pensions problem. It will be less of a problem than it might otherwise have been, but still probably worse than the one currently being debated in the press.