LONDON (Reuters Breakingviews) - The World Economic Forum should know better. In its recent white paper on pensions, “We’ll live to 100 – how can we afford it?” the group behind the Davos uber-conference repeats the conventional wisdom on the topic: that everyone should save more. While that might be helpful advice for many reasons, no amount of current savings can reduce the burden of future pensions.
Mercer, the pension fund adviser that provided the numbers for the WEF report, estimates a gap between current savings and future liabilities of a fear-inducing $67 trillion in eight big economies as of 2015. Three-quarters of that total is in “unfunded” state pension plans. The scare quotes are justified, because there is nothing to fear. Governments always have a simple way to fund these plans – through taxes.
WEF, Mercer and many voters may see a world of difference between collecting future taxes and liquidating past savings, but they are confused. In terms of cash flows, the effect of taxes and asset sales is the same. If the oldies of 2025 or 2050 are to live off the value of their accumulated portfolios, their spending money will come out the equivalent of a tax on people still in work. After all, the only way for former workers to cash in their investments is by selling them to current workers. And the pensioners’ interest and dividend income doesn’t emerge from thin air. It comes out of the prices paid by workers.
The similar cash flows of tax and savings-based plans reflect the economic reality of any pension arrangement. Pensioners’ current spending money must be part of the total current national income.
There are various ways to arrange the split. Traditionally, working offspring shared their money with non-working parents. Now, workers in developed economies typically pay taxes and old people receive state pensions. And there is the preferred WEF way – pensioners collect principal and income payments from workers. The choice of how to spread the wealth is fundamentally political or cultural.
The debate over what mix of techniques to use is obscured by what logicians call the fallacy of composition – the failure to recognise that the whole can be quite different from the sum of the parts. Yes, any one of us can save up for old age. Putting money aside will usually work out fine. For the entire economy, though, there is something illusory about savings, since almost all current consumption comes out of current production.
Economies should store up reserve supplies to deal with disasters, but that sort of saving is not relevant to pensions. It makes no sense to build up stockpiles of colostomy bags, X-ray machines and empty care homes to be drawn down a decade or two from now, when there will be more old people to consume them.
What does make sense is to keep demographic changes in mind when planning investments. So build more wheelchair-compatible housing and train more geriatric specialists. But those decisions have nothing to do with increasing the quantity of dedicated pension savings. Defenders of pension savings plans sometimes argue that such arrangements, which often come with tax incentives, help increase national investment rates. The evidence to support that claim is scanty.
In any case, this is the wrong time to ask for more pension savings, because the numbers are too big for financial markets to bear. The WEF study estimates that the global ratio of workers to retired people will decrease from eight to four over the next 35 years. So by 2050 there will be half as many workers available as now to buy out each pensioner’s investments. And corporate profits, market valuations and long-term interest rates may not co-operate. It is safer and simpler to rely on children and taxes.
Besides, the reliance on privately funded pensions is likely to increase economic inequality, since the rich always save more than the poor. They have more money to spare. The rich also tend to have access to better information, lower fees and higher returns. In contrast, state pension plans are generally universal and the level of payments is usually only partly based on past income. Such systems are also relatively cheap to run.
The shortage of pension savings is a fake problem. In highly productive, developed economies, it will be easy to provide future retirees with a good lifestyle, especially if retirement ages continue to rise. After all, humanity has never been able to turn so little labour into so many goods and services.
But there is a real pension problem – a shortage of social solidarity. If everyone believed that it is just and natural for the total national income to be shared by everyone in the nation, then the supposed pension challenge would simply melt away. So rather than encourage selfish fretting, the WEF would do better to call for the spread of a more generous spirit.