Difficulty Of Extending Universal State Pensions (Part 2)

With the coverage of defined benefit pensions falling, other private sector means of providing retirement income are tending to fall short. Although the financial products to provide a retirement income exist, they end up under-utilised in practice. The alternative is for the central government to step up its provision of retirement income replacement. However, the wide income disparity within the "middle class" means that it is difficult to provide wider coverage without creating structural changes to the economy.

The Difficulty Of Extending Universal State Pensions (Part 1)

I have previously discussed the framework of private sector pension provision, I will now turn to universal public pensions. These universal pensions offer a safety net with benefits that are comparable to low income deciles; that is, they give seniors an income that is in line with the working poor. Such an arrangement has been highly robust politically, and there is little sign of that changing (in the absence of major realignment of societies). However, this views the benefits in relative terms; we have little way of knowing what future benefits will correspond to in absolute terms. I discuss this using Canadian data to provide context. Follow up article(s) will cover the difficulties of expanding these schemes in order to make up for the gaps in private sector pension provision.

Limitations Of Private Sector Pension Provision

The traditional defined benefit pension is a very advantageous means for workers to provide a retirement income. Most workers are in the private sector, and the current structure of the economy is no longer compatible with widespread defined benefit pension schemes. Defined contribution schemes (discussed in this earlier article) can be readily provided by the private sector, but they have drawbacks from the point of view of policymakers. Unfortunately, it is not easy for the government to provide anything other than a fairly minimal universal pension for political reasons; I will turn to the public option in a later article.

Advantages And Disadvantages Of Defined Contribution Pensions

This article is part of a sequence of articles that discuss some of the policy issues surrounding pensions. (My introductory article is here.)  In it, I look at what is now the default option for private sector pensions: defined contribution pensions. Since I am interested in looking at this from the point of view of policy, I also include various retirement savings tax shelters along with formal defined contribution plans offered by firms. Defined contribution plans work well for people with high contribution rates, but the problem is that many workers have make inadequate contributions. This is creating large cohorts of people heading into retirement with portfolios that cannot replace their working income, which is unsatisfactory for policymakers.

Pensions And Public Policy: The Golden Era

The pension industry is the result of complicated regulations, and discussions about pensions often devolve into arcane technical debates. In my view, this hiding behind technical arguments is a mistake; the economic analysis of pensions from the point of view of the public interest is straightforward. What the technical complexity hides is the complete lack of coherent views amongst policymakers as to what the public interest is. As a result, the problems with pension policy are moral, not technical.

Government Pensions Are Always Pay-As-You-Go

A central government pension plan is always a pay-as-you-go plan. If the government attempts to “capitalise” the plan by purchasing financial assets, this is really just an attempt to arbitrage the financial markets: it is issuing debt to purchase other financial assets, which are hoped to provide a greater return than the liabilities it issues. This analysis is applicable to central governments within floating currency systems. For example, state and municipal governments face financing risks and thus they cannot assume that they will always be a going concern. This means that pension promises for such governments need to be capitalised to be credible, which is the same situation for corporate pensions.