Let's Not Panic about Pensions: There Is No "Longevity Crisis", Only Decisions to Be Made about How We Pay for Retirement

Article excerpt

Adair Turner is not an obviously scary person. Parents certainly do not threaten their children by saying that the softly spoken former McKinsey consultant will come and get them unless they eat their broccoli. But this bogeyman has been doing his Hallowe'en best over the past weeks to frighten the workers with the prospect of a long and impoverished old age.

The report by the government's Pensions Commission, chaired by Turner, is full of dire predictions, prompting newspaper headlines about "black holes", "time bombs" and "crises".

Pensions is an area politicians like to describe as "complex"--which is actually code for "politically difficult". In fact, as the commission demonstrates, the issue is utterly straightforward. People are living longer and not saving enough, which means they will either have to work for longer, live on less in retirement or be bailed out by the government.

Pensions is also an area in which political compasses swing wildly. Ten years ago, one of the two major parties was fiercely critical of means testing in old age and advocated a higher state pension for all. That party's opponents lauded a policy of directing limited funds to those in greatest need. The argument today is identical--but Tories and Labour have switched sides.

There are some real issues to be resolved here, and the government clearly made a mistake by raiding occupational pension funds in 1998 (which, within government, only Frank Field warned about).

None the less, the language of crisis is neither helpful nor accurate. It is not helpful because people, being what they are, discount with ease warnings of imminent disaster. Think of the continual warnings about environmental collapse, or the Aids adverts trying to terrify people out of unprotected sex. In neither case has behaviour been appreciably altered.

In any case, it is not clear that we are sitting on a "time bomb". First, the pension predictions are based on predictions of life expectancy--or, in the terminology of the pension policy wonks, "longevity risk".

In the space of 25 years, almost five years has been added to the estimated post-65 average lifespan. This is an unprecedented rise--and government actuaries believe that lifespans will keep lengthening. On the other hand, the Department of Health is warning that the predicted rise in obesity could reverse this. The point is that we don't know. Actuaries make very serious, informed guesses about these matters; but they are guesses all the same.

Second, even if the figures are correct, it is not clear that we are looking down the barrel of bankruptcy. The Pensions Commission estimates that, if the gap were to be filled by public spending, by 2050 the bill will be roughly [pounds sterling]57 bn a year at today's prices--about 7.5 per cent of GDP. Now, when you add the odd billion here to the odd billion there, you are pretty soon talking about real money. …