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Pensions: what private finance doesn’t want you to know

Richard Minns and Sarah Sexton take on the lies about retirement provision

June 27, 2011
10 min read

Debates about pensions often seem complex. Public or private? Personal or company? Final salary or defined contribution? But most of these debates are not really about pensions at all. The abundance of myths about welfare for people at a certain stage in their lives adds to the smoke and mirrors of passionate but obscure arguments.

Myths, though, are social constructions of reality designed to protect vested interests. Uncovering these interests is critical to constructing another reality.

As hundreds of thousands of trade unionists prepare to strike to defend their pensions, here we look at the key myths that are deployed against them again and again.

MYTH: Ageing populations are a burden on the state

Let’s start with a myth that is propagated by nearly everyone: the idea that ageing populations are a burden on the state, on working people and on younger generations.

Older people are often described as ‘threats’, setting off demographic ‘time-bombs’, causing conflict between generations unless they can be financially contained. But this is not true.

People in many countries (but not all) are certainly living longer and older people are becoming a larger proportion of the population (at least until the baby boomers die, or because AIDS has ravaged younger ones, or because birth rates have plummeted).

That doesn’t necessarily mean that state pensions can’t be afforded, however. It is rather that public spending priorities are being placed elsewhere, such as defence expenditure, national security, and bank and corporate welfare.

Instead of boosting state pension, which would increase older people’s spending and their savings, all to the benefit of workers and the wider economy, plans are being made to cut them adrift. Younger workers feel frightened into increasing their private savings with private pension funds out of their dwindling net private income if they don’t want to face a similar fate (even though such savings didn’t save current pensioners).

In fact, as we shall see, it is the stock market model of social welfare that exacerbates conflict within and between generations, classes and workers.

MYTH: There is a growing ratio of young to old

Another version of the ‘ageing population’ myth is that the ratio of old to young people is said to be growing. This, it is argued, adds to the ‘burden’ that older people represent and increases the ‘dependency ratio’: the number of non-earning members of society who depend, albeit indirectly, on wage earners.

Rarely mentioned is that societies managed to find the money to feed, clothe, house and educate the baby boomers for their first 16 to 20 years, when they were ‘dependents’, before they started working. And as public sector services are cut back still further, older people will be those increasing their child care, community and charity work that contributes to an active economy.

Historical records suggest that the overall dependency ratio (paid workers to non-paid workers) has been more or less constant over time, even if the composition of those not working has changed over time.

MYTH: There are not enough savings to pay for old age

We are all regularly exhorted to ‘save more’ for our retirement. In fact, there are more than enough private savings around the world to fund decent pensions.

It’s a matter of distribution and political priorities – not of whether you buy a loaf of bread or put your wages in your deposit account. What is insufficient is the ways and means of distributing savings equitably, and of controlling and ensuring equitable and sustainable investment.

Pensioners who have put aside money in advance of retirement and those who receive money taken out of current taxation all depend on what the economy produces and society provides at the time when they are actually pensioners, and at what prices – unless they store up 20 years’ worth of tinned food, dried milk and a hip replacement or two beforehand.

The myth about funding pensions in advance or not serves simply to hide a conflict over how to divide current national income and who should get it.

MYTH: Public sector pensions are privileged

That takes us on to public sector pensions. These are increasingly cast as overly generous schemes for ‘privileged’ public sector workers and contrasted with private sector schemes that are being closed or cut in value because of the Great Financial Crisis.

In the context of the wider economy, however, not only are public sector pensions affordable and minimal, but UK public sector and state pensions are among the lowest in the OECD.

The problem is not with public sector pensions, but with the spectacular failure of private ones. It is ironic that the private sector financial institutions are being recruited to ‘relieve’ the state of its supposed pensions burden, when the real effect is to make up for failings in the private sector itself.

At the same time, the American manager of RBS (now a nationalised bank) has received a pension bonus of £735,000, which reminds us of what myths are really for – social constructions of reality to protect vested interests.

MYTH: The language of pensions

The language used to describe pensions is a myth in itself – one that underpins most pension debates.

‘Burden’ is a favourite word to describe old people and their pensions, ‘crisis’ another. ‘Savings’ are invariably good, but ‘taxes’ are bad, even though in the pensions world the concepts are actually the same. The difference is that ‘savings’ refers to the private financial sector and ‘taxes’ to the state (even though public sector finances are now largely captured by financial capital).

Winning acceptance of the need for people to save more for their retirement is really a political issue: savings are much easier to sell than taxes.

If there is a pensions ‘crisis’, it is that there are too many people in poverty in their old age because of unemployment, low wages and a shift in income distribution away from wages towards profits that has figured in the pension debate for 50 years.

MYTH: Private finance knows best

In the UK, pensions mythology began some 50 years ago as successive governments agreed a deal on ‘final salary’ pensions with the trade union movement: employer-led pensions, managed by private financial institutions, based on final salaries and paid out in future, would be guaranteed (for the most part) in exchange for wage restraint in the present.

Previously companies would agree final salary schemes with trade unions for a trade off of wages for pensions. As a result, pensions were regarded as ‘deferred wages’.

This deal was a fake. In practice, it was an enormous transfer of economic power from labour to finance capital, the politics of which have not yet been fully explored. The legacy, however, is still with us today: private finance is said to be the best judge of where to place savings and the most efficient way to allocate them so as to promote investment in order to boost the resources available to provide for people’s retirement.

MYTH: Private pension funds are good for the economy

According to this myth it is a good thing to encourage, or force, people to put some of their wages into private pension funds, not just for them but for the wider economy. The idea is that these funds will invest the money, primarily in stock markets and increasingly in alternative vehicles such as hedge funds, and this will increase financial capital, stock market growth, corporate investment and productivity. All this, in theory, will result in higher national wealth to pay pensions.

This theory was unproven even before the financial crisis. The World Bank, a leading pedlar of the myth for 20 years or so, admitted that even if such privatisation did not increase pensions, it would at least increase the size of stock markets around the world – a concession that reveals the real priorities behind the myth. World Bank figures show a rise in stock markets, which has nothing whatsoever to do with economic growth.

MYTH: Pension funds support innovation

Advocates of UK and US-style pension systems that rely on stock markets say such systems allegedly result not only in higher economic growth but also more money for venture capital funds that will support innovation, needed for growing economies.

Most innovation, though, is initiated and backed by the state; pension funds and other private investors get involved much later on when the state has completed the initial high risk investment and sells it on.

The privatisation of pensions has led neither to better pensions for more people, nor to greater economic growth – and arguably has contributed to near financial collapse. Just consider the numbers of pension funds that have closed to new entrants, and existing members, when we were all told how essential the system was for our welfare.

MYTH: The state can’t run pensions

Even if public sector pensions were not paid for out of our current taxation or national insurance contributions, and the state ran its own type of provident fund, it would still come in for criticism. There is now a myth that the state can’t provide pensions at all. The World Bank, for instance, in its 1994 publication on averting the old age ‘crisis’ (solution: protect the old by promoting economic growth) states that provident funds are ‘a backdoor to nationalisation’, its real concern. The World Bank, incidentally, is a public institution that provides its employees with one of the best pension arrangements in the world.

In the Singapore provident fund, where the state provides all pensions management, fees are 1.5 per cent. In Chile, the exemplar for privatisation, the fees have been upwards from 15 per cent.

In fact, countries such as Chile and Argentina, which were the subject of major privatisations of pension provision, have now gone into reverse. Chile is providing state support for people who cannot provide for themselves and Argentina has nationalised its private system.

MYTH: Personal pensions make sense because people want choice and can look after themselves

But the clincher in current pensions mythology is this one concerning ‘personal pensions’: individuals can look after themselves because they have greater ‘choice’ and power over how their future retirement income is saved and provided.

In reality, an estimated 40 to 45 per cent of their pension contributions will be consumed by various administrative fees and costs, providing profits for the pension fund.

Individual personal pensions have not generated a surge in domestic savings that could support productive investment and economic growth, meaning that pensions cannot in any sense be paid for in advance.

All these pension myths have been a cover over the past two decades or so to expand stock markets, liberalise financial markets and change the role of the state.

What the privatisation of pensions has done is to distribute more income to the financial sector and the highest paid individuals, while relying on the public sector to subsidise them and to support those from whom insufficient profits can be made.

Private pension provision increases rather than lessens the risk of insecurity in old age: the enormous expansion of financial market risk continues to expose pensioners to serious asset meltdown.

This mythbuster draws on Too Many Grannies? Private Pensions, Corporate Welfare and Growing Insecurity by Richard Minns with Sarah Sexton.

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