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The Actuary The magazine of the Institute & Faculty of Actuaries
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Book review: Pension provision

The arresting title of this paper is fully justified by what follows; an impressive array of authors from various countries have put together a comprehensive document which highlights the sheer lack of ability of government to make sensible decisions on retirement policy. I use the words ‘retirement policy’ advisedly, because one of the paper’s recurring themes is that informal arrangements, from family support to voluntary organisations, constitute a vital pillar which rarely receives a passing thought by government.

The paper also covers in depth another equally important feature which governments rarely if ever acknowledge, namely the economics of politics in the form of the voting patterns in ageing populations, where the ‘median voter’ has every interest in preserving or increasing subsidies from younger generations. Indeed wider patterns of behaviour, including reinforcement of ageing by deliberately low fertility following reduced reliance on family support, are crucial yet ignored by policymakers. It is appropriate to mention here that the time horizons of government, particular under modern democracies, are quite simply incompatible with sensible retirement policies.

The paper is split into three sections. Section 1 traces the history of the mature western democracies, with particular reference to the UK, which is summed up as ‘from filling in gaps to permanent dominance’ (of government) – a phenomenon which is common throughout the Welfare State (including Health and Education and their constant decline).

Section II ‘The State and Vested Interests versus the People’ charts the problems of reforming policy around the world in the face of powerful interest groups. These run from (i) the Luddites usually present in developed democracies running State Pay-As-You-Go schemes (for example, transfers from those working to those retired, dubbed ‘Pray-As-You-Pay’ by Arthur Seldon several decades ago) through (ii) emerging economies such as those in Latin America, where in some instances authoritarian governments have greater power to push through sensible reforms, to (iii) Less Developed Countries (LDCs) such as India and China where the coverage of formal systems is extremely low. There is also an interesting contrast between Hong Kong and Singapore.

Outside the cosy consensus of the World Bank’s ‘pillars’ of formal pension provision, another world exists which the Bank is only just beginning to appreciate – the fundamental significance of the family and its generations, as well as the role of more formal but nevertheless entirely private mutual support in the shape of Friendly Societies and charities. The undoubted crowding out by the State of natural mechanisms is surely close to criminal behaviour, especially in LDCs with low formal coverage.

Section III looks at government programmes and incentives, particularly in the face of the ageing populations of the western world. The means-testing issue is given a thorough airing, including a look at the many disincentives to work in the USA. Other controversial issues include the effects on overall savings of compulsory schemes (far from being a no-brainer) and tax policy versus social policy in the UK.

As one might expect from a diverse group of authors, there are occasional differences of opinion. Perhaps the most interesting one concerns means-testing, where all shades between two extreme positions are discernible. Thus on the one hand means-tested benefits result in lower savings and incentives whilst on the other hand universal benefits are very costly. In my opinion, the whole argument for universal benefits so as to avoid the disincentive effects of means-testing rests on a fallacy. It is not possible to help the poor without finding them; the alternative of taking from all and giving to all (in two discrete and unconnected procedures) creates enormous losses in living standards (see Economic Affairs, T. Arthur, March 2003).

Nevertheless the paper is an absolute gem and a real eye-opener in a number of areas – for example ‘public choice economics’ or the economics of politics, by which groups of voters and politicians seek to better themselves at the expense of everyone else. The effects on when to retire, as well as when and whether to have children are explored – as are the problems of compulsory savings, which may replace other, and possibly better, savings vehicles.

I can thoroughly recommend this superb paper to those interested in retirement issues, whether professionals in pensions, professionals in other fields, or indeed those without any ‘formal’ qualifications. And I can almost guarantee that pension professionals in particular will look upon their own areas of expertise as rather mundane in the light of some of the broader issues given attention by the paper.

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Terry Arthur is a UK actuary, non-executive director, freelance writer, a Visiting fellow of The Institute of Economic Affairs (London) and an adjunct scholar of the Ludwig von Mises Institute(USA).