[A-List] Contradictions of capitalism: pensions crisis
Michael.Keaney at mbs.fi
Mon Mar 11 02:10:50 MST 2002
Presently the UK is gripped by unease as recognition of the catastrophe
awaiting many as they plan for retirement sinks in. In keeping with the
privatise the profits, socialise the costs logic of capitalism,
companies that were supposed to be picking up the slack via occupational
schemes are now reining in their contributions to employees' pensions,
as more switch from schemes that guarantee a pension based on the
employee's final salary towards those that place all the risk on the
employee -- i.e., the accrued earnings of the total contributions made
to the scheme by the employee. Enron is only the tip of the iceberg, but
it has provided a nice illustration of what can happen when large
amounts of life savings are abused in the service of the CEO's stock
options, etc. There is a far wider scandal that relates to the
suddenness of this "crisis", as for many years companies boasted of
having achieved such good results with their schemes, accumulating
surplus after surplus such that "contributions holidays" became a
regular fixture in the annual accounts. Privatisation in the UK added
another ingredient to this, involving the transfer of pension fund
assets from state-appointed trustees to those of the new private
companies, who were, of course, eager to ensure that all this loot was
available for private use. Thus the long-running case of the former
state-owned National Bus Corporation, in which, only after many years
and the deaths of many former employees, it was recognised finally in
law that the pension fund was not to be used as a private slush fund by
the new managers of the private enterprise, supposedly empowered to be
more "entrepreneurial" in accordance with the Thatcherite ethos. Part of
that entrepreneurialism was the shameless use of others' funds for
personal aggrandisement in terms that far exceeded the typical staples
of public choice theorists hell-bent on showing the innate inefficiency
and corruption of the state's economic activities *per se*. Meanwhile
there was Robert Maxwell, whose pilfering of Mirror Group Newspapers'
pension funds led to a state-led mopping up operation overseen by former
MI5 agent and Westland affair veteran "Lord" John Cuckney, whose quiet
reparations won praise from relieved MPs and business persons eager not
to see the entire system tarnished with the sort of opprobrium that was
gleefully heaped upon Maxwell himself, post mortem. But now we have a
situation where the privatisation of pension provision has suddenly put
into question the whole system of pensions provision, and an inevitable
recognition that, under our present economic system at least, longer
working lives are coming, and the dream of a safe and pleasant
retirement, is, for growing numbers of current workers, just that.
The new alternative to retirement: carry on working till you drop
Monday March 11, 2002
For a workaholic such as Gordon Brown, the thought of postponing
retirement for a couple of years to secure a better pension may not seem
that alarming. But as the chancellor burns the midnight oil preparing
for the Budget next month, a growing number of experts are warning that
many people could be forced to work until their early 70s in order to
afford to be able to retire.
Industry, unions and the City are warning that the government must
address the looming crisis in Britain's pension system.
As the box shows, the main problem is not the cost of the state pension
- the Conservatives' decision in 1979 to cut the link between pensions
and rising earnings has at least ensured that Britain's limited scheme
is cheap to run. But the occupational and private pensions which were
supposed to top up the state system may not be enough to keep the next
generation of pensioners out of poverty.
The problem is that firms are no longer keen to provide the gold-plated
final salary schemes which have allowed a lucky minority in previous
generations to retire on a comfortable income. A depressed stock market
and a change in accounting rules which has forced businesses to explain
the cost of funding the schemes to their shareholders have convinced
many that the schemes are too expensive.
Firms have responded by closing final salary schemes and forcing new
employees on to money purchase schemes where the worker carries the
risk. Instead of guaranteeing a pension linked to salary, in a money
purchase scheme workers builds up individual pension pots, which they
use to buy an annuity when they retire. Retirement income depends on how
well the investments do and on annuity rates.
When firms switch to money purchase schemes, they usually use the
changeover as an excuse cut their own contributions. Meanwhile annuity
rates are falling because of rising life expectancy and lower inflation.
The result is that experts believe most of us are making far too little
provision for our retirement. The average male needs to have £100,000 in
his pension scheme to retire on an annual income of around £8,000, but
most people have saved less than £30,000 by the time they reach 65.
Labour has so far rejected calls from the increasingly vocal grey lobby
to restore the link between pensions and earnings. Instead Mr Brown has
targeted more money at the poorest pensioners and those who have not
been able to save very much.
Even pensions experts find the chancellor's new schemes complicated.
Take-up of stakeholder pensions has got off to a slow start. The
complexity of the scheme is a problem, according to experts at the
Institute for Public Policy Research because it makes it hard for lower
earners to figure out if it is worthwhile saving for a private pension
Those who save only a small amount may find that they lose much of their
entitlement to the means-tested top up.
The IPPR has proposed a return to a more generous universal state
pension. They want the government to raise the state pension to the
level of the minimum income guarantee, restore the earnings link and
scrap means testing and the state second pension entirely. This would
take the basic pension up to around £100 a week. To pay for it , the
retirement age would have to be raised to 67.
The idea has received a cool response from ministers. For most workers
dreams of early retirement are going to prove hopelessly unrealistic.
Full article at:
Mercuria Business School
michael.keaney at mbs.fi
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