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Pensions and climate create a dual timebomb

25 April 2014

Through usury, the Government is burdening future generations with huge, unsustainable debts, argues Michael Northcott

THE UK, like many developed economies, is in the midst of a debt crisis of momentous proportions. The combination of private and public debts, including unfunded pension liabilities, represents a pile of debt equivalent to 500 per cent of GDP, according to a wide range of economists. The last time the UK was this indebted was just before the Great Depression in 1929. This quantity of debt represents a form of indentured servitude of the population, and a form of intergenerational injustice of grave proportions.

Most of this debt is owed to a very small number of commercial banks and wealthy individuals - many of them claiming to reside off-shore for tax purposes. Much of the debt was fictionally created by banks in the first place, in the form of loans to individuals and businesses, and not by government or the Royal Mint. The debt has also inflated the market prices of housing, land, and essential services, such as education, energy, health care, and water.

The biologist Jared Diamond, in his influential book Collapse: How societies choose to fail or survive (Penguin, 2005, 2011), argues that the failure of contemporary humanity to act prudentially with respect to the environment and other long-run risks is because human beings are not good at dealing with such risks. But I beg to differ. The real reason is that 20th-century governments became inherent risk-takers, and visitors of risk on future generations.

This is illustrated most clearly in the extent to which nation states have become accustomed to sponsoring such a large scale of state and corporate activities from the pubic purse that they are unable to fund them without issuing promissory notes (government bonds being the most common form) to be paid by future generations.

The failure of the nations to mitigate the long-run risks to future generations of climate change is part of a much larger tendency in the modern world towards intergenerational injustice. The Christian traditiongives strong grounds for resisting this.

LORD STERN has estimated the present-day costs of mitigating carbon emissions, and so reducing the future costs of climate change, as two per cent of annual GDP. The cheapest mitigating activities include building-insulation, diet- modification to reduce reliance on meat and dairy produce, and encouragement of low-carbon transport, including walking and cycling.

The UK Government, however, has a stunningly poor record on all three of these money-saving proposals (money-saving because they would dramatically reduce health costs, as well as lower household and hence welfare bills for fuel and food); in the mean time, it promises vast sums of money to the builders of new power stations.

The refusal prudently to reduce costs from climate change to future generations - and hence to reduce the intergenerational injustice that a less habitable planet would represent for them - is sadly consistent with government behaviour, and the behaviour of banks and the City of London, in other spheres of activity.

The UK already devotes more than two per cent of annual GDP to paying an intergenerational debt in the form of government-backed public pensions. The Office for National Statistics, at a meeting at the Royal Society on 27 April 2012, officially announced for the first time that the UK Government is committed to paying £5 trillion to its future retirees in payments to beneficiaries of public-employee pension schemes and the universal state pension.

WHILE these are vast sums, it is important to remember that they will never fall due in any one year, but over decades. None the less, public-pension payments are already the largest type of government expenditure in the UK, taking up 21 per cent of expenditure in 2013 at £139 billion; and this percentage will grow as the population of public-pension beneficiaries ages.

Many economists believe that there is a demographic time-bomb hidden in public pensions, which - with a worsening ratio of working to retired people, and with future constraints on GDP (for example, from climate change and the declining availability of cheap energy) - looks unsustainable.

The reason for the unsustainable size of the pensions burden is that the UK Government in the 20th century established a series of pension arrangements that were no more than promissory notes across the generations. The first was the universal citizen pension, established in 1908, which pays every citizen a pension from the public purse from the age of 60 for women and 65 for men until their death (rising to 68 from 2046).

The second was a series of pension arrangements for public employees (teachers, nurses, Forces personnel, doctors, civil servants, and others) which promised to pay them pensions on retirement in addition to the state pension. Most of these arrangements - with the principal exceptions of employees in local government and higher education - were not backed by public or private investments, or by savings of any kind: they were merely promises to pay, made by past governments on behalf of future governments, against future government receipts.

IN MALAYSIA, where I lived in the 1980s, there are a similar set of pension procedures to those in the UK, but with one essential difference: the universal pension, and the public-service pensions, are all funded. This means that when you are employed in Malaysia, you are required to make monthly pension contributions into the Employees Provident Fund (EPF), and when you are employed in public service, you and your employer pay into a public-service pension.

The funds that build up belong to the individual, although they are invested in a collective pot, until drawn down by the individual during retirement. Hence Malaysian citizens and public employees receive pensions at retirement as the proceeds from the pensioninvestments that they have built up in their own name. At the end of 2013, the EPF (which was established in 1951) had funds of $US178 billion.

PEOPLE are living longer than they did when such pension funds were established, and hence actuarial sums on contribution-payments ratios are having to be revised to ensure that funds can meet obligations. There are similar issues with many private-pension schemes in the UK and Europe. But actuarial adjustments can resolve these in properly funded pensions, since there is a real pot of money in each of these pension schemes, which belongs to each individual contributor: judgements can be made on investment returns and the balance between these and continuing contributions to the funds by successor contributors.

Here, however, is the radical difference with UK public-pension schemes. In the UK, there are no investment funds behind the state and most other pubic pensions. National Insurance is only a tax, analogous to income tax, and is treated by HM Treasury as government income in the same way as other taxes.

One of the reasons why the Government continues with unfunded pension liabilities is that it follows the advice of "welfare economists", who argue that economic growth is a reliable feature of modern fossil-fuelled industrial economies: governments therefore borrow money, and raise expenditure beyond present net national receipts, in the expectation of increased future GDP and net receipts, from which to pay the interest and principal of debts.

If, however, there is a larger economic lesson to be learned from climate change and the related declining availability of cheap energy, it is that economic growth is not endless. The earth is finite, and its atmosphere has a finite capacity to absorb waste gases from fossil fuels, without risking the enduring habitability of the earth.

THE intergenerational injustice of the pension time-bomb and rising house prices, together with the refusal of present generations to mitigate climate change, underline the extent to which the modern economy rests on usury. Governments refuse to commit even two per cent of GDP to the reduction of climate-changing fossil-fuel dependence, because they discount the costs of the reduced habitability of the planet to future people.

Governments also discount future costs against present expenditure because their expenditure and liabilities are calculated on the basis of interest rates. This is because, if money now is more expensive than money next year - which it is when you "buy" money that you do not have now, at interest - then money values a year hence (including the monetary value of an environmental hazard such as a less stable climate) are lower by the rate of interest at which money is currently lent.

The Old Testament banned usury in Israel between the Hebrews because the Hebrews saw interest-bearing money debt as a form of interpersonal bondage, which enslaved debtor to lender, and future generations to the debts of past generations.

The New Testament and the church Fathers extended the ban on usury to all. Usury remained a mortal sin until the Reformation, and it was only under pressure from the 16th-century rise of mercantilism in Venice, Milan, Geneva, and London that the proscription was reluctantly relaxed by John Calvin and others among the Reformers. The way had been paved already, though, by scholastic theologians, in their efforts to excuse the vast scale of papal lending - much of it in the form of interest-bearing loans - for the building of St Peter's in Rome.

NOW, 97 per cent of money in the UK economy is created through interest-bearing debt, and not by the Government or the Bank of England. As a paper by Bank of England economists, Money Creation in the Modern Economy, published in March 2014, shows, debt-based, or leveraged, money is fictionally entered into the asset side of a bank's balance sheet, when an individual signs a promissory note to repay debt in the form of a credit agreement or mortgage.

The growth in bank debt-creation since the Thatcher-era demutualisation of building societies, and the Stock Exchange "big bang" of 1987 has fuelled dramatic rises in house prices, land values, and in user fees for services such as water, energy, and education.

The quantity of debt created by commercial banks was responsible not only for the global financial crisis in 2008, but also for the continuing burden of debt carried by households, and by govern-ment.

The truth that the Government itself will not admit is that bank-created money is out of its control. This refusal is in part because the neoclassical economists who advise the Government (including the Treasury) refuse to admit that money is any more than a medium of exchange. But economists' inability to account for the power of money in their economic models has hidden the extent to which exponential growth in debt-based money is destroying the social contract between Government and people, and between the generations, in the UK today.

IN CHRIST's first sermon in Nazareth, he announced that the jubilee year, the "acceptable year", had arrived in his person. Leviticus 25 indicates that debts were written down to nought in Israel every 50 years, as the lands that underwrote them were returned to the families who had lost them to debt.

Debt-forgiveness is also the central petition of the Lord's Prayer. From Joseph to Jesus, the Bible tells a story about slavery and salvation, debt-bondage and forgiveness. Since the Reformation, however, the story of salvation has gradually turned from a message of socio-political liberation into one of inward personal piety.

In this perspective, the efforts of the Archbishop of Canterbury, early in his time at Lambeth, to resist the worst kind of usury in the form of payday loans, which attract 5000-per-cent interest rates, are highly significant. Yet the Government refuses to restrain interest rates legally, and hence to restrain usury.

Instead, it offers only to cap the number of times a loan can be rolled over. This is because the City of London is built on debt-based money and usury, and the Government refuses to take back controlof the money supply as a public good.

Instead of grasping the nettle of intergenerational injustice, and reintroducing restraints on commercial money-creation, the Government has instead scapegoated people on housing benefit, the disabled, and the unemployed, whose combined welfare receipts are a small fraction of the cost of unfunded pension liabilities.

Meanwhile, government annual borrowing from the commercial bankers of the City of London, who now effectively control the pound, since most pounds are in the form of debts owed to City banks, has quadrupled since 2008 - all of it underwritten by interest-bearing bonds sold to the City and to be paid down by future generations of taxpayers.

THE extent of debt in Britain and in other modern economies is not only a cause of misery to the poor and to indebted households, and the payers of extortionate user-fees, such as undergraduates for their education: it is also a cause of intergenerational displacement of mounting costs from an unsustainable growthist economy.

Without growth in economic activity, measured as GDP - including the burning of fossil fuels, the mining of minerals, the cutting down of ancient forests, the erosion of precious topsoil, and the industrial harvesting of the oceans - governments, businesses, and households cannot meet the payments on their debt.

Debt-based money nearly destroyed the UK and the whole global economy in 2008. Attempts to "pay down" commercial debt by governments by scapegoating the poor are fracturing communities across Europe, and have led to a vast and unjust extent of youth unemployment.

Governments, however, fail to address the cause of the problem, which is the "commercial freedoms" of banks to continue to create money from nothing, in the form of debt. At some point in the present century, the modern usurious economy will be served with a time-up card - either by a vast crash in asset prices, as governments and individuals fail to meet debt and pension obligations, or by an ecological crisis, as governments put off to the future the costs of repairing and reducing our debts to the planet from unsustainable growth.

Do we want to allow our grandchildren to be the ones on whom that card is served? If not, then, as Christians, we need to recover the biblical ban on usury, and the related biblical understanding of intergenerational justice, and announce them as the social meaning of salvation to a nation that continues to pile up financial and ecological liabilities on present and future generations.

The Revd Michael Northcott is Professor of Ethics in the University of Edinburgh, and the author ofA Political Theology of Climate Change (SPCK, 2014).

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