From the Revd Ian Hill
Sir, - A common mistake, apparently made by both your
correspondents (9 May 2014) and by Professor Northcott (Features,
25 April), is to believe that a "funded" pension scheme is somehow
not paid for by the current working generation, because it is paid
for from "savings" - and therefore doesn't lead to
It is an economic truism that the entire output of the country
(GDP(O)) has to come from those who are economically active (i.e.,
working). Savings, just like bank notes, are effectively an IOU
that we expect to be paid out in the future.
The income into a "funded" pension scheme comes from interest
and dividends that are ultimately provided by those currently in
work (for example, by receiving lower wages so that the dividends
or interest can be paid). Where assets are sold in exchange for
consumption, that consumption is also, by definition, provided by
those who are economically active (i.e., working).
A significant amount of government debt is owned by pension and
annuity funds, and these debts are, by definition, incurred when
they are bought. Those purchasing government debt to fund their
pension are, therefore, also accruing an intergenerational debt to
be repaid by the future taxpayer. Surely, it is a moot point
whether pensions are paid through taxes via "unfunded" pension
schemes, or paid through taxes raised to repay debt to pensioners
with "funded" pension schemes.
Whether pensions are "funded" or not, it is always those
currently working who support the lifestyle of those who are
There is also a big difference between the public-sector pension
schemes and the state pension, and this also seems to be leading to
confusion. Public-sector pensions have already been earned by
current and former public-sector workers, and are a form of
deferred pay: they are effectively a government debt like any
other. The state pension is, however, a benefit paid to older
people in the same way as unemployment benefit is paid to those out
of work, and maternity benefit to those having children.
Professor Northcott's general question still stands: to what
extent should those in work be supporting those who are not?
Perhaps, however, for clarity of debate, it should be split into
three distinct questions:
First, are current workers getting a fair deal from those
demanding a share of what they produce?
Second, how fair are the current levels of government
indebtedness (government debt, public-sector pensions, and other
liabilities) which future generations will have to repay?
Third, to what extent should people promise themselves a benefit
(state pension, NHS treatment, nursing-home fees, etc.) that they
expect others to pay?
The question how pension schemes are funded is a different one,
which perhaps would be better raised by an economist than by an
(former economic statistician at the Office of National
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Buntingford SG9 9BH
From Mr Andrew Bebington
Sir, - A. M. Hughes's letter (9 May) makes
a good point about public-sector pension schemes; may I add an
example of the consequences of the deficit he mentions?
I am chairman of a local charity with an annual budget of some
£400,000. One current staff member and several former ones are
members of the local-government pension scheme run by our local
authority. We are told that, if the current staff member leaves
(retirement, resignation, death . . .), our share of the deficit
crystallises and becomes payable immediately.
The amount? £700,000, well in excess of our reserves, which
means the charity would close. This would mean that our clients -
4000 last year, and heading for well over that this year - would
have nowhere equivalent to turn for advice.
It also would mean that the local economy would lose out by
something between £2 million and £7 million (a wide uncertainty
arises because many clients don't tell us the detailed outcome of
our help and intervention).
This is repeated across the country, and the pension deficit has
more serious repercussions, more widely, than many realise.
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