FT letter on economics of pensions and risk

by Dr. Ros Altmann

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Joseph Stiglitz's warnings to US policymakers (FT 21st March) excellently encapsulate the results of the UK's past twenty year pension privatisation experiment. Offloading the costs of pension provision away from the state system onto employers or individual accounts, has left us with a pensions crisis, insecurity and poverty among the elderly, over half of pensioners needing means tested benefits and mushrooming unfunded pension liabilities - for both public and private sector employers - which dwarf our national debt.

There seems to be a fundamental misunderstanding of the economics of pensions. Transferring risk from state to private sectors does not make that risk disappear. The costs and risks of providing private pensions are too high and their ultimate failure to provide adequate incomes pushes the burden of support back onto the state anyway.

The bottom line is that pensions, as we currently think of them, are unsustainable. We are trying to make them last too long. Rising numbers of people demanding decent pensions for decades, while not being part of the productive economy, is a recipe for long-term economic decline. And a huge waste of resources. We must re-think the whole concept of retirement. Part-time work and gradual withdrawal from the labour force at older ages would mean pensions supplementing earnings, not totally replacing them. Private savings cannot deliver enough to provide decades of decent pensions in future. Haven't we learnt that already?

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