A case for nationalizing pensions

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.

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.

Comments

[Felix FitzRoy]

Excellent idea.Important additional benefit, if the pension at 65 or 67 is unconditional and un-taxed for all citizens, no matter how much or little they have worked, then no one will lose out, and there is no incentive to stop working at pension age, so labour supply and tax revenue would rise as people live longer.
The state pension naturally complements a smaller universal basic income for all adults, and a job guarantee for those who cannot find work at around the minimum wage.

[Iain Coleman]

I wouldn't give Osborne much credit for the triple lock. It was a Lib Dem policy, which the Lib Dems prioritised in the coalition agreement, implemented by a Lib Dem minister.

[Coprolite]

Two important points are missing.

1 never going to happen because people who can influence views are already well provided for.

2 economics of pensions works over a time frame if at least 10 parliaments. There is a strong incentive to favour particular cohorts in any given parliament and this is unlikely to be seen as just by other cohorts.
If the state pension for current pensioners goes up both current taxpayers and pensioners who have saved privately will feel aggrieved. If it goes up for future pensioners/ current taxpayers then today's pensioners will feel put out.

There Has been absolute fury about extending the age by two years. Changing the whole basis would require principles, intelligence and perspective. S

[JohnB]

Excellent post. I agree with the premise, that it makes much more sense to nationalise pensions than utilities. Utilities mostly work in the private sector. You can compare and switch providers easily. You can insulate your house, or buy a more energy efficient one, to save on bills.

In comparison for most people it’s hard to impossible to switch your pension. It’s even harder to know whether it’s right to switch, or whether your current pension is best, until it’s far too late. And the fees collected by private pension providers are just rent seeking, with no economic justification.

Pensions have far more in common with health provision than utilities. As with health there is a strong case for provision to be nationalised, for all but those willing to pay over the odds for something outside state provision

[Paine]

The electric power
transmission grid should be socialized
Not the generators

finance insurance
and land lots
Should be socialized

Pensions are a proper sub set
of insurance

The sovereign could issue
inflation protected consoles
To zero out socially useless
Pure " financial " rents

[Paine]

"The logic of capitalism, however, requires that capitalist firms have sources of profits."

We can easily sublate this
Context warraneted logic
If we
Institute new systems

Privatized
Social surplus
extracted
Thru
open entry firm level enterprise
Inside market exchanges

Is hardly eternal all against all
A second state of nature so to speak

We now can immortalize firms
as well as slaughter them

This option alone
Implies
A brave new world
Self mobilizing
in the womb of society

[Dipper]

I'm not sure what you mean here. Do you mean that I will not be allowed to buy shares and bonds to provide me with an income in retirement because that is the job of the state? Do you mean that I will be unable to pay additional amounts into a pension pot?

I think that the state could offer itself as a pension provider. It could offer citizens a guaranteed final salary scheme pension based on contributions. I think that when many citizens see how little the state is prepared to offer in return for hard earned cash that firstly many private sector workers will look at their state-employed friends and rellies and wonder how the state can make such generous provisions for them, and secondly many state-employees may wonder what kind of incomes they could have now in return for reduced pension rights.

[cjcjc]

Should one not look at the (very high level of) stability of dividends rather than prices?
And it is low equity valuations rather than high equity returns which represent a higher cost of capital, ie high expected returns, though perhaps this is what you meant.

[chris]

@ Dipper - I'm not proposing any ban at all. I'd like to see the state pension become more generous so that there's less need for private provision,so the latter gradually withers away. I see nothing wrong with adding an earnings-related element to the basic state pension, like SERPS.

[MJW]

To make the idea robust it would have to be optional and done at clear arms length from the state pension and welfare. Otherwise it just becomes subsumed into the overarching policies of taxation and welfare benefits. Without clear separation you will just perpetuate some existing welfare problems such as free riding, ponzi scheme structures and political favouritism. My personal pension is ME opting to defer MY consumption now so I can consume it later, it's not the same as compulsory contributions I'm required to make towards societal welfare via taxes.

[Ken Oliver]

Nice to see someone reviving analytic points that were first made by the pioneers of the welfare state; the language may be different but none of yuor points would be novel to the framers of the 1911 People's Budget.

As a civil servant (not a UK one) specialising in pension and welfare policy I argued just these points to my masters for decades. The only result was to limit my own career; the prejudice for "private good, public very very bad" is just too strong, at least in the anglosphere.