"The Economist" over pensioenfondsen
19 februari 2002
De overheidspensioenfondsen zijn vrijwel overal ter wereld opgezet als een "pyramidespel".
De huidige jongeren betalen voor de huidige ouderen. Dat gaat goed bij een groeiende bevolking , maar de rapen zijn gaar wanneer de bevolking veroudert.
The Economist wijdt een heel "Survey" aan de pensioenen in de Westerse wereld en pleit daarin voor snelle hervormingen om financiele rampen te voorkomen.
Het opent met: "Stel u een wereld voor waarin u geen rechtstreeks eigendomsrecht heeft over uw belangrijkste financiele bezit, waarschijnlijk meer waard dan uw huis; waar de waarde van dat bezit geen relatie heeft met wat u er aan besteed hebt; en waar dat bezit, en de teruggave ervan, op willekeurige en oneerlijke wijze wordt toegekend."
Zo wordt weer duidelijk dat de overheid een buitengewoon slechte verzekeringsmaatschappij is die wat pensioenen betreft een blikveld heeft wat nauwelijks over een 4-jarige regeerperiode heen gaat.
Time to grow up
Feb 14th 2002
Pension systems in rich countries are not working properly. They need a radical overhaul, argues Paul Wallace Rex
IMAGINE a world where you had no direct property right to your most important financial asset, probably worth more than your house; where the value of that asset bore no direct relationship to what you had put into it; and where that asset, and the return on it, was often assigned to you arbitrarily and unfairly.
In fact you don't have to do much imagining at all: the peculiar world of pensions is all around us. To take one example, in America the value of future public-pension payments for a typical household headed by a 65-year-old man is $180,000; but this is not a legally enforceable claim to ownership, as a Supreme Court ruling made clear in 1960. Not that the post-war generations of pensioners in the developed world have been much bothered by such legal niceties. After all, many of them have seen a spectacular return on their contributions, receiving far more in benefits than their due.
One way of thinking about public pensions is as a form of insurance for which you pay premiums while you are working, against the predictable risk of a period without earnings later in life. Such a system of insurance, you would expect, would convert your contributions, together with the interest they earn, into pension benefits in an actuarially fair way. When you retired, your pension would reflect the contributions you had made, plus interest, and the length of time you were likely to spend in retirement, except that a small amount would be deducted to provide a minimum-income guarantee for those who, through illness or misfortune, had been unable to build up enough contributions of their own.
Again, real-life pensions fail to pass this test. Public pension systems do not achieve a reasonable trade-off between actuarial fairness and protection against poverty in old age. What they mainly do is redistribute income from the young (who may be poor) to the old (who may be rich), often in an inequitable way.
Nor do pensions provided by companies come off much better. “Final-salary” schemes, until recently the most common form of private pension, are often just as actuarially unfair as public pensions. Early leavers lose out, whereas time-servers and top managers do disproportionately well.
Pension systems that work so capriciously make little sense at the best of times, and even less in an ageing world. Populations in the West and Japan are no longer pyramid-shaped as they used to be, with a big base of younger people and few pensioners at the top. Instead they are becoming top-heavy, with many more older people both in the workforce and in retirement. Ill-designed pension systems magnify the effect of population ageing by creating incentives for people to retire ever earlier. Unaffordable public-pension commitments threaten the fiscal solvency of many countries in the European Union.
Some people even see pensions as a national security issue, arguing they are set to gobble up so much public money that they may crowd out defence spending. Richard Parsons, the co-chairman of the president's commission on reforming pensions in America, pointed out last November that his country had been able to mount an effective response to the terrorist attacks of September 11th because it could afford a military arsenal, thanks to its strong balance-sheet. But, he added, “30 years from now, if we do not do something to fix the Social-Security system, we are not going to have a strong balance-sheet.” Paul Hewitt, an analyst at the Centre for Strategic and International Studies in Washington, DC, claims that “our pension systems are a strategic liability”.
State pensions were established when old age spelt poverty for most people, to which they offered a collective and paternalistic solution in the form of a pay-as-you-go (PAYG) pension system. Such systems tax the income of workers and transfer it to pensioners. They rest on an implied but unenforceable contract between generations: the future pensions of those working today depend upon a future generation of workers. The pensions are paid as defined benefits (DB), which means they are not expressly linked to what workers have paid in contributions. Instead, pensioners get a defined level of income, usually related to average pay.
Company pensions, unlike public PAYG systems, are backed by funds or assets. Where they pay out defined benefits, as in final-salary schemes, they too are essentially paternalistic. Employees get pensions that replace their final working incomes at a rate reflecting the time they have spent in the company. The company shoulders the risk that investment returns may disappoint, or that its pensioners might live longer than expected.
But whatever their virtues in the past, both final-salary pension and PAYG schemes are inappropriate for today's ageing populations in the West and Japan. Pensions need to grow up, which will require radical changes in their architecture (see article).
The shape of things to come
Governments and companies recognise this, and have embarked on various reforms. First, most countries are shifting their pension systems away from PAYG towards funding, thus ensuring that a larger proportion of pensions is paid from savings that have been invested in financial assets. Such investments can be built up either in a public reserve fund or in privately held individual retirement accounts.
Second, pension regimes that offer defined benefits are giving way to the sort that link payments to contributions. With defined contributions (DC), the link between what people put in and what they get out is made explicit. There is no promise of any particular level of benefits. Individuals themselves have to ensure that they build up enough assets to provide an adequate retirement income. With that responsibility comes the right of ownership to pensions.
These reforms are transforming both state and company pensions, with their welfarist and paternalist origins, into regimes that allow people to take charge of their own retirement provision. This should be for the good. Allowing individuals to plan for their own retirement will allow them to strike the right balance between saving while they are working and drawing down their funds in retirement. Yet it also means that many more people will face new forms of risk, particularly investment risk, which the bear market of the past two years has highlighted.
Here, too, there is a need to grow up. The long bull market of the 1980s and 1990s persuaded many people that pension capital can be built up with little sacrifice. Not so: it takes a lot of hard saving. Buoyant financial markets also encouraged the fond belief that a shift from a PAYG to a funded system will be easy. Not so again: it involves real losses to people. One of the main arguments for reform now is to get younger generations started on building alternative funding streams.
Yet despite these caveats, this survey will argue that incurring the costs of switching to a different system and shouldering new kinds of risk is less hazardous than carrying on as before. The traditional pension regime has two main faults: it ties state pensions to the decisions of future politicians (and the electorates that vote them into power), and it creates incentives that favour early retirement and discourage job mobility. Reform may be painful, but it is the only way out of the pension trap in which so many western countries now find themselves.