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Pensions and intergenerational justice

by
16 May 2014

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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 "intergenerational injustice".

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 retired.

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 ethicist.

IAN HILL
(former economic statistician at the Office of National Statistics)
The Vicarage, Vicarage Road
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.

ANDY BEBINGTON
79 Shirley Way, Shirley
Croydon CR0 8PL

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