Sunday, March 1, 2009

Chelsea pensioner

This week the British government finally got tough on banking's 'Fat Cats'. By inviting Sir Fred Goodwin, former head of the bankrupt RBS group, to voluntarily forego part of his £16 million pension package. I'm sure Sir Fred is giving the matter his full consideration.

One irony of this situation is that the recent neoliberal orthodoxy has held that our publicly funded pensions systems are unsustainable. Pay-as-you-go schemes in which workers paid contributions to finance current retiree pensions, and thus built up entitlements to their own future pensions, are a luxury we cannot afford. The aging population means that the delicate balance of working-age to retired citizens has shifted, and there will not be enough future workers making contributions for future pensions to be paid. The alternative is that individuals should make their own private provision, investing in pension funds which will pay out once they have stopped working.

The crux of the problem is that we are just too healthy these days. Even in the UK, which does not have a particular longevity 'problem' compared with healthier societies such as Japan or Italy, life expectancy at age 65 has shot up to 81 for men and 84 for women. This means than the average pensioner has to be maintained by P-A-Y-G contributors for 15-20 years. Can this be done?

Well, it can, provided we don't follow Fred Goodwin's example. He has retired, aged 50, with a pension worth £650,000 per year. This means a total payout in today's money (simple arithmetic with nominal figures) of £20,150,000 if he lives to 81 (I sincerely hope he does). That amount of money would pay for 4,272 British pensioners for a whole year at the basic state pension of £90.70 per week.

As a society, we have to come to terms with the fact that early retirement on generous pensions is simply a redistribution from this generation of the young to this generation of the old. This is the case whether the pensions are state funded, or privately funded - they still require transfers of consumption from the working age population to retirees either way.

Sir Fred's deal has made the case both for sensible and socially equitable retirement ages and for state provision. After all, the main alternative to public PAYG pension provision is private investment, and the collapse of the stock market resulting from irresponsible banking has destroyed the value of the pension funds on which the private option rests. Some desperately unlucky 65 year olds have financed bankers' generous pensions through the high management fees charged on their pension funds, and have ended up with under-funded pensions as a result of the banks' inability to manage our money properly. Privatized pensions look great when the stock market is booming, but... the prices of shares can go both up and down.

So maybe we should be grateful for Sir Fred. His remarkable performance as scapegoat for a discredited profession has made public provision of pensions look like a great idea again.