The State can take longevity risk.
“The government pays interest to private organizations for the use of its own credit . . . So that actually the government is getting itself into debt to the banks for the privilege of helping them to regain their stranglehold on the economic life of the country.” Senator Bronson Cutting New York Times 1934.
I read this article at college – referred by that poetical blogger Ezra Pound. Pound’s fury was not at money but at greed which he considered the true evil.
Yesterday I read this from Michael Johnson on a mallowstreet thread.
This house believes that the only place for the state to assume longevity risk is via an enhanced state pension
I’ve consistently argued that it is not the State‘s responsibility to tax people into financial solvency in old age. People should have the right to opt out of the communal mechanisms that act as the default for retirement savings whether through self-employment, through personal pensions or deliberate fecklessness. The State has an obligation to ensure that even the feckless have a minimum retirement income in old age and if we fix this at the Basic State Pension or better the enhanced Citizen Pension then that is the State’s obligation met.
But by the same standard, the State has an obligation to ensure that those who wish to provide for themselves, can do so as efficiently as possible. I am convinced communal or collective pensions deliver better outcomes than individual pensions. Studies by John Shuttleworth in the 1990s showed that pensions organised by companies and paid from communal pension funds wer up to 50% more efficient than pensions accumulated and decumulated through personal pension plans and individual annuities.
Since John’s death, the inefficiencies of individual policies have reduced in accumulation (the management charges of personal pensions) but increased in the decumulation phase (the impact of solvency regulation on annuities).
Indeed, despite a lot of talk about longevity swaps, there is no evidence that the private sector has found the secret to insuring the cost of people living longer. It has merely found ways of insuring itself against the risks of ruin.
What has happened and is happening is that people are swapping inflation linked retirement income steams written on a joint life basis for single life level income streams.
The traditional sources of scheme pensions have dried up;- it is virtually impossible to find a DB plan that will take in transfers from DC in return for a fixed pension. When this does occasionally happen, the fixed pension is set at the open market rate, making the option pointless.
In short, the private sector is unable to provide longevity cover to the nation and is effectively offering those wishing to convert accumulated retirement savings, Hobson’s choice; income drawdown (beyond the means of most) or guaranteed annuities (with all their inefficiencies).
The impact of this market failure will not be fully felt for many years to come , but as inflation eats into the level annuities and as the annuitants die leaving their spouses and partners with no residual income, the extent of the current failure will become evident.
The outcome of this market failure will be general and will ultimately require state intervention. Either the State will be required to take up the strain by increasing unfunded pensions or there will have to be an extension of means tested benefits (which in economic terms amounts to much the same thing).
Here is the rest of Michael’s post
Consequently, all public sector pensions should be moved to a wholly DC framework. Furthermore, we should start tip-toeing to a funded framework, starting with compulsory NEST participation for all public sector workers.
The link is clear;- DC is seen as a means of off-loading longevity risk from the state to the private sector;- ultimately the individual annuitant.
But why should the State do this if the private sector are failing to efficiently provide longevity insurance?
Why instead don’t we turn this problem around and ask whether the DC accumulation system (which is becoming efficient) could not convert to a state insured decumulation? There is already over £10bn in the PPF, there are established state pension payment systems and we have the actuarial talent within the PPF, tPR, DWP and GAD to create a new state pension which can harness the economies of scale the state provide not just to current annuitants but to the millions of annuitants forecast to be arising from NEST.
Self sufficiency in retirement is a right that every citizen should be offered the state can facilitate self-sufficiency by giving hand ups not hand outs (a horrible resonance I know). It can do so because we still have a state pension apparatus that is strong, well run and fir for this purpose. Let’s not look this gift-horse in the mouth.