PensionReforms' summary and comments
People know (or should know) that they will get old and that they will have to (or want to) stop working.  The numbers are compelling - more than 80% of a given age group in developed countries will make it to an age when they will be forced into (or will want to contemplate) retirement.  So why does the state get involved?  150 years ago, no national government was involved in the provision of pensions for all its citizens.  Retirement income systems in developed countries are now so complex that perhaps we should think about returning to 'simpler' times.

This report (from someone who might be expected to urge the complete disengagement of the state from public programmes altogether) suggests not.  Perhaps a pull-back; certainly a greater sharing of risks along with increased faith in the inherent good sense of citizens are more likely to be successful than more of what we do now.

"Old-age security in the absence of public programs would come from a number of sources, including extended families, savings in financial markets, mutual-aid societies and charity. There might also be scope for a small basic pension at an older age such as 75.  It is however impossible to predict exactly what old-age security would look like in the absence of government programs. Institutions and customs related to old-age security are interlinked and complex wholes that feed into each other." 

Whatever the state does for retirement income support interferes in private provision - the report notes that ".. the imposition of compulsory, large-scale public PAYGO systems will undermine private PAYGO systems (i.e., families and extended families). Governments taking care of the poor will also undermine voluntary associations and mutual-help societies because of the crowding-out effect.  Even private market solutions may undermine nonmarket institutions, although in some respects they also complement each other. Institutions do not exist in a vacuum; they are born and maintained for a purpose, and when that purpose ceases to exist, institutions can be eroded."

Relying on a single solution or even a single type of solution, such as compulsory private provision, tends to raise the risks of failure.  Having many sources of material support in retirement diversifies society's (and individuals') risks because of what the report calls ". systemic heterogeneity. There would be many different systems linking to each other and complementing each other, which gives rise to a totality that is more robust, more flexible, and more adaptable than any kind of formal solution.  When people are left free to solve their problems, they are surprisingly responsible and creative in sorting things out."

It sounds a touch old-fashioned but the idea of "prudence" should be fostered; also  ".. charity - not just external charitable acts, but true charity, which stems from the heart and requires continuous interior conversion. It also requires being watchful of the temptation to shirk personal moral responsibility by relying solely on government policies or on the merits of competitive markets, because the virtue of charity is a characteristic of human persons, not of institutions."

This does not mean the state should simply withdraw from what it does now - ". economic liberalization alone is not enough to restore charity.  Charity comes from individual men and women who, through their work, family life, and generosity toward the needy, are called to cooperate in the creative, lifegiving, and redemptive action of God."

With specific regard to the shape of the "small basic pension" the report says:
"A potentially better option would be to have a small basic pension, available universally regardless of contributions. The overall cost of such a pension could in theory be reduced by making it means-tested, but the experience with means-testing is highly negative because it creates harmful incentives and tends to exacerbate income inequalities. The cost could also be cut in other ways, such as setting a higher eligibility age, something in the range of 70 through 75. The benefit level should also be made low, so that it is only relevant for those who really need it. The small basic pension would assist in cases where people have failed to save enough and have no family to support them and would also provide additional support for those who live unusually long."

PensionReforms agrees with the report's fundamental recommendation though we take issue with the author's probable thoughts on the amount of the pension or the age from which it might be payable.  PensionReforms hesitates to attach labels but it is refreshing to read what might be called a 'libertarian' viewpoint shying away from the idea that forced private provision should replace the state.  It has always struck PensionReforms as odd that the answer from many to the idea of 'more personal responsibility for retirement income' is forced saving - where is the personal responsibility there?

There is no mention in the report of tax incentives (their cost and complexity) but we imagine that the author might be opposed to those as well.  If citizens are truly to be left "free to solve their problems", paying them to save (and then asking them to pay more tax to pay themselves to do so) might also be off the agenda.

PensionReforms thinks that the report probably expects too much of charity and local social organisations given the huge changes in social structures that have accompanied the growth of state intervention in private retirement income decisions.  However, our differences with the author would probably be resolved in the needed debate on the size and shape of the "small basic pension".

With the author's permission, this paper is in the PensionReforms' library.  The "more" takes you to that copy. (File size 305KB) 194