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Author: chris dillow   |   Latest post: Thu, 6 Aug 2020, 2:10 PM

 

A case for nationalizing pensions

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One of the fundamental questions in politics is: what should be done by the state, and what by the private sector? In at least one respect, I suspect that we have the mix wrong because there is a strong case for nationalizing pension provision - stronger, I suspect, than is the case for nationalizing utilities.

I say so because, as I point out in the day job, retirees and those approaching retirement face enormous uncertainties if they are managing their own pension: how long will I live? What will my spending needs be? And what will be investment returns? (Yes, equity returns have been great in recent decades, but we have no assurance whatsoever that the future will resemble the past.)

The state, however, is much better placed than the private sector to bear these risks. It can obviously pool longevity risk. And tax revenues are more stable than investment returns: in the financial crisis they fell only 3.4 per cent peak-to trough whereas MSCI's world index in sterling terms fell eight times as much*. In particular, there is one source of risk to equity returns that the state can pool whereas retirees cannot - distribution risk, the danger of a shift in incomes from profits to wages. This would clobber (pdf) share prices, but not tax revenues.

And then, of course, there are deadweight costs. A private pension fund manager might easily charge a management fee of 0.5 per cent per year. On a £100,000 pension pot invested over 20 years, that can add up to over £20,000. State pensions are cheaper to administer. Fund managers are rich, civil servants are not, That's a clue.

A common objection to a higher state pension is that it is unaffordable. This is nonsense in both fact and theory.

It's nonsense in fact because spending on the UK state pension is projected to stay low. The OBR estimates that spending on pensions and other old-age benefits will rise from around six per cent of GDP now to 7.9 per cent in 2057-58. This would mean the state will spend less then than many European countries do today - among them Germany, which is not noted for fiscal profligacy.

It's nonsense in theory too because, in a closed economy, all pensioners' incomes must come from value-added created by current workers. The question is whether they pay pensioners via the tax system, or via the dividends and interest their employers pay**. For a given level of pensions, the burden is the same - only the name changes.

Granted, private pensions change this calculation by investing overseas and so extracting pensioners' incomes from foreign workers. But the state can do this too. As Eric Lonergan has argued, we could set up a sovereign wealth fund which borrows at current gilt yields (almost minus 2% real) to buy higher yielding assets. Over time, this should give us all a big pension pot. Frapens

Even without that, however, we can achieve a sort of creeping nationalization over time by slightly strengthening the triple lock, one of George Osborne's few laudable achievements in office. If we could look forward to a more generous state pension, we'd have less need to buy a private one so the latter would gradually wither.

We should regard the privatization of pensions as an example of how technocratic economic rationality can conflict with the logic of capitalism. Technocratic rationality says there's a case for high state pensions. The logic of capitalism, however, requires that capitalist firms have sources of profits.

Another issue here is of course political risk: can we trust future governments to continue to raise pensions? Doing so requires there to be strong public demand for such a rise so that governments will fear a backlash if they do backslide. In this respect, the British can learn a lot from French protesters against pension cuts. We must regard a high and rising state pension not as a benefit but as an entitlement.

Which brings me to an under-appreciated point. The problem here is not merely one of economic privatization. A feature of modern British capitalism - neoliberalism if you like - has been a form of psychological privatization. What should be regarded as social problems have become individual ones. We see this with a lot of discussion of personal debt and mental health - an insufficient awareness of the social pressures which generate these. The same has happened with pensions. The question: "how can we as a society provide a decent income for older people?" has become: "how can I provide for my pension?" For too many - even the well-informed and affluent - this is too difficult a question.

* Of course, returns on more balanced portfolios were far more stable than equities - especially if they held decent quantities of non-sterling cash. But there are huge uncertainties about future risks and returns to balanced portfolios as well.

** OK, so taxes might deter investment, if they are badly designed. But so too do dividends and interest: high equity returns and bond yields mean a high cost of capital, by definition.

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