FT letter
on economics of pensions and risk

by Dr. Ros Altmann

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Joseph Stiglitz’s
warnings to US policymakers (FT 21st March) excellently encapsulate
the results of the UK’s past twenty year pension privatisation
experiment. Offloading the costs of pension provision away from the
state system onto employers or individual accounts, has left us with
a pensions crisis, insecurity and poverty among the elderly, over
half of pensioners needing means tested benefits and mushrooming
unfunded pension liabilities – for both public and private sector
employers – which dwarf our national debt.

There seems to be a fundamental misunderstanding of the economics of
pensions. Transferring risk from state to private sectors does not
make that risk disappear. The costs and risks of providing private
pensions are too high and their ultimate failure to provide adequate
incomes pushes the burden of support back onto the state anyway.

The bottom line is that pensions, as we currently think of them, are
unsustainable. We are trying to make them last too long. Rising
numbers of people demanding decent pensions for decades, while not
being part of the productive economy, is a recipe for long-term
economic decline. And a huge waste of resources. We must re-think
the whole concept of retirement. Part-time work and gradual
withdrawal from the labour force at older ages would mean pensions
supplementing earnings, not totally replacing them. Private savings
cannot deliver enough to provide decades of decent pensions in
future. Haven’t we learnt that already?