Should governments around the world "own" the social security or pension systems? Or should governments only regulate them?
That is one of several issues in the widening debate taking place in many countries on how best to provide retirement income.
The issue isn't only how to reform present pay-as-you-go systems, now burdening governments with an "invisible debt" as their costs swell. That is whether to tinker with the present system or move to a privatized funded system.
Other issues concern:
* How to invest the assets of newly funded systems. Do investment restrictions harm returns?
* How funded systems help capital markets and economies. But are the new funds just being shifted from other assets without a net gain in capital?
Throughout the world, the normally dull subject of pensions is generating argument and debate. There are two fundamental reasons for the interest. First is the demographic reality. Second is the cost of current and projected public pensions to the state.
On demographics, two major changes have occurred in the industrialized world since 1950. People have not only stopped dying so young; they also have stopped having so many children. As a result, the number of people of working age in most OECD [Organization for Economic Cooperation and Development] countries is stabilizing or set to fall.
The ratio of people of working age to those over 65 -- known as the support ratio -- is declining. In countries like the United Kingdom and Sweden, the support ratio is 4. In the United States and Japan, it is about 6. The most striking feature is not the difference between the countries now, but how their position is expected to converge by 2040 at an average 2.7.
The support ratio understates the extent of the problem. In practice, the proportion of people of working age who are actually in work has been falling for a variety of reasons. An increasing proportion stay on in school and further education. The number of unemployed has risen. So have the numbers taking early retirement. Also, as Christopher DeMuth, president, American Enterprise Institute for Public Policy Research, Washington, notes, "Voluntary reduction in time spent at paid employment has become a major social and economic phenomenon." This is illustrated by Professor Robert W. Fogel, University of Chicago, who estimates that since 1880 the time devoted each week by the average American male head of household to non-work activities has risen from 10.5 hours to 40 hours a week, while time at work has been cut nearly in half, from 61.6 to 33.6 hours.
This decline in working activity has only been partly offset by the increasing proportion of women entering paid employment.
As a result of these factors, the real ratio of people in work -- as opposed to the support ratio -- to those above the state pension age is already only between 1.4 and 2.7 in most OECD countries. Some forecasts show it falling to as low as 1 to 1, for example in France, by the year 2020.
The scale of the problem produced by this demographic change is indicated by the World Bank's projection on pension spending in OECD countries. It believes these costs could almost double as a percentage of gross domestic product from about 8% in 1990 to 17% in 2030. The impact on the state's share of those costs is what worries democratic politicians.
If no action is taken, by 2030 state pension payments could be, for example, between 15% and 20% of GDP in Germany, Italy and France, surely an unsustainable position.
There exists in these countries the "invisible debt" problem. That is the explicit and implicit liabilities by the various countries caused by their promises to pay public pensions. Public pension liabilities are in excess of 68% of GDP in all major industrial countries except the U.K. and the U.S., and this is of course on present demography and current pension plan parameters. France, Germany and Japan face the largest imbalances. Many smaller European industrial countries, including Belgium, Denmark, Greece, Luxembourg, Portugal and Spain face pension systems imbalances of a similar magnitude.
The choices are obvious: increase contributions; decrease benefits paid; increase age of entitlement; or shift the burden from the current taxpayer to a funded system. None of the first three choices are entirely satisfactory solutions.
More fundamental action is required. Hence the pressure to move from a taxpayer driven pay-as-you-go basis to a funded system. Many would see the last choice, however, as a transference not a removal of the cost. But the advantages of lessening dependence on the state, along with the growing diversity of income sources, is clear.
For one, individuals will have lessened reliance on the state, and the sense of independence and choice the ownership of their retirement assets produces. The state can contemplate the graying of its population with relative financial equanimity and the diminished numbers of employees in the 21st century need not be obsessed by the proportion of their tax revenues funding ever more dependent pensioners.
But establishing a funded system isn't enough. There are debates on how to invest the assets. One issue is the degree to which countries restrict the investment of individual pension funds' asset class or location. This limit can have a marked effect on the success or failure of a funded system. There are many illustrations of this: Belgium requires that 15% of pension fund assets are to be in Belgium government bonds or Singapore's insistence that more than 90% of its fund invest in essentially non-tradable government securities.
The net returns over long periods show the poor results in those countries using such restraints. In Singapore, for example, the government-run Central Provident Fund has yielded since 1980 just 2% more than inflation. In the same period, U.K. private pension funds have yielded nearly 10% a year more than inflation. An actuary will tell you that investing the same amount over a working lifetime at these yields would imply a British private pension four times as large as that available from the Singapore state scheme.
An additional debate has developed around the question of funded pension schemes: Do such funded systems add to a nation's GDP?
The suggestion is that this, especially if compulsory, adds to the pool of investment capital, helps to deepen liquidity and, all things being equal, increases investment and ultimately GDP as a consequence. The contrary argument is that funded savings are simply offset by the discouragement to other savings. This contention is supported by conventional economic doctrine that says capital markets working in a global economy means there need be no correlation between the amounts nations save and their volume of investment.
Having spent some years arguing with my highly intelligent officials in the U.K. Treasury, I am instinctively uncomfortable with such rational economic nostrum, and believe strongly that there would be a significant boost to GDP. Beyond this, I have yet to see a better answer than funded pension schemes to the inherent dilemma faced by a graying world dominated by unsustainable and unfunded pensions promises.
There is one other issue that emerges from U.K. experience and that is the need to regulate, rather than own, the pensions industry. Proper regulation to protect the interests of pension beneficiaries is entirely appropriate, as the Maxwell and other cases illustrate. The U.K. lessons in this area are clear, intelligent regulation to protect the consumer from abuse, not regulation aimed at constraining the effective workings of the market.
I am bound to say I feel faintly pessimistic about the future. The action that is needed is obvious. The issues are quite clear, but so is the short-term pain associated with action. Few politicians embrace unpopularity by choice, few nations embrace decisions with pensions time frames. This is an inevitable recipe for procrastination -- democracy's bedfellow.
