Solving the pensions crisis

Pensions are a big issue. The basic reason is that we are now living so long. Whereas fifty years ago the typical person only drew a pension for five to ten years, that has increased now to twenty or thirty years. That is probably a four fold increase within a generation. And who knows how long we will all be living in thirty years from now?

Neither countries nor companies have done enough to catch up. One of the biggest factors in all the debts of rich world countries are pension liabilities. Part of it is paying state funded old aged pensions to all older folk, but a bigger chunk is typically the full pensions of people who worked in the public sector.

As an example, the British post office is a solid little business operationally, even though we don’t post as many letters as we used to. What cripples it is all the pensions of retired and retiring postal workers. The government have tried to privatise it a few times, but no one will touch the pension liability.

Companies are the same. The crisis in Detroit with the big three American car manufacturers was almost exclusively a pensions crisis. Just like with the post office, these companies had an ever growing mountain of retired workers, and a declining core business which couldn’t meet the liabilities. Nowadays, whenever one company takes over another company, the biggest deal breaker is often the state of the pension liability. If you join a company or want to invest in a company, be sure to read up about its pensions.

For a time, both countries and companies were fooled by a financial trick, namely that investments always rise by more than inflation. A lot of people used to fall for the same trick when agreeing to buy endowment mortgages. It was thought that pension funds, where employees effectively invest during their careers in order to reclaim when retired, would just grow and grow, and that investment growth would pay for the extra longevity. What rubbish! We know better now after repeated busts in investment markets.

Companies have mainly taken the most important step to at least stop the problem getting worse, by removing so called final salary schemes, thus balancing out the expected receipts and liabilities, at least for new employees. It is the baby boomers who are getting a free lunch, having paid less and now likely to receive more.

Wary of unions and voters, state firms are way behind in this game. Expect this to be one of the biggest changes in the new age of deficit reduction, But it is too little too late in many cases, as the liabilities have already ballooned out of control, and everyone is loathe to renege on existing commitments.

So, apart from just blithely drifting towards unsustainable debt (the primary apparent policy in the US and elsewhere), other remedies slowly come into play. One is raising the retirement age. But baby boom voters seem to be so precious, that the acceptable rate of change is very slow. We had recent riots in France when an increase from 60 to 62 was proposed, and even in the UK, the increase from 65 to 66 only kicks in around 2020. Nonetheless, expect a lot more of this, not just of general pension ages but also of the expected retirement ages for state workers.

Defence and police forces do especially well, often picking up pensions from their early fifties. Seemingly that is an unwritten trade off against the type of work they do, though for me it would be more transparent if that came through wages.

The other game in town is persuading people to work longer voluntarily. Indeed, legislation coming through means anyone who wants to continue working can do so in many countries. This is sneakily marketed as offering opportunity to older people, and in part it is, though the primary purpose is to save pension money.

For companies, though, this leads to a problem, especially companies with many bands of seniority grades. That is because there is a strong correlation between age and seniority, indeed it is almost unheard of to demote anyone. So as people stay on longer, the company has a higher wage bill they can’t afford.

But does older always been better? You would think so if you look at company wage structures, and also the lack of retirement expectations on politicians themselves, not to mention kings or popes. Of course, age brings experience and wisdom and knowledge, and indeed older people are especially suitable for some job types, for example coaching or documentation. But are these older folk as savvy with computers? Or as familiar with new processes? Or as sprightly, or as prepared to invest more energy and effort to feed their ambition? Sometimes yes, but usually no.

So I advocate a breaking of the automatic link between seniority and age. A typical career might then follow the same pattern as now until someone reaches their mid fifties, but then suffer a gradual drop off as their ambition fades. Of course, some people would continue to improve and justify further promotion, but opening the path to demotion would have many benefits.

The company could then join in the campaign to get people to stay longer with enthusiasm rather than trepidation. People would be more ready to look at lower intensity jobs or even part time jobs, as a useful bridge towards retirement. There would be fewer burnouts or crashes as people reached their level of incompetence. Specific jobs could be designed for experienced workers, without these having disproportionate rewards. Companies would be better run, and more closely resemble societies they operate in.

Oh, and we could go a long way to solving the global pensions crisis.