The public pension pyramid scheme



In a recent piece I wrote for Conservative Home about pensions, I made the following observation about the challenges involved in defusing the time bomb that projected entitlements for older citizens have set ticking under the public finances:

“This problem is very difficult to tackle because older people are not only much more likely to vote but feel fully entitled to what several generations of politicians have told them is their due. They have, after all, ‘paid in’.

“Of course they have no in fact done anything of the kind, for the most part: their tax contributions funded current expenditure, and were not squirrelled away to bankroll their retirements. In the private sector such pyramid arrangements are illegal.”

Following a Twitter furore over an unrelated piece which involved my “call to abolish pensions” being dragged in, one user aptly embodied the challenge in a single Tweet:


Setting aside the separate issue of the extent to which the Government is legally bound to promised entitlements – and our Tweeter pegs it at the level of a contractual obligation – it set me thinking about which side of this argument has best claim to the mantle of “fairness”.

What are those sides? One is certainly those silver citizens who either draw upon the entitlements under dispute or stand to do so.

At first glance the other is the Government. That is certainly the party charged with actually implementing changes to pensions, and the foe upon whom the advocates of the elderly will concentrate their fire.

But in my view the actual second party in this quarrel is the young, the future generations of taxpayers who will be expected to support an ever-broadening stratum of older dependents. It is their case which strikes me as the more compelling.

The line from the older generation is as straightforward as that set out in the gentleman’s tweet above: we were promised this, money was taken from us on the pretext of paying for it, so we are entitled to it.

But as I pointed out in the piece he is objecting to, in most cases they really haven’t “paid in” to anything. Every pound the state took from them in taxes it spent – indeed as our deficit attests, more than every pound.

It’s very easy to blame the politicians, and certainly generations of Britain’s political leaders must shoulder their share of it. But fundamentally, the reason we ended up with so many governments which spent more than they raised is because those are the programmes that won elections.

So today’s older voters have already spent decades voting to spend their children’s money. In this view it is almost impossible to see how they could be in credit with the state – yet that is precisely the logic of the “we’ve paid in” position.

No, what the “we’ve paid in” argument amounts to is the idea that the nominal collection of a portion of their money “for their pensions” entitles them to a further claim on the future earnings of tomorrow’s taxpayers – even though that initially-collected money has already been spent, on themselves.

The tragedy is that in the overwhelming majority of instances there is no mendacity at work here. The man I linked above is one of the few I’ve seen to baldly state that yes, governments do lie but a promise is a promise and he wants his cash.

For the most part, people do not follow policy closely or think about politics very much. They have simply been told by the people running the country that they have been making provision for their retirement and planned accordingly.

Public pensions really have been a pyramid scheme: rather than setting the money aside and investing it properly, the Government has simply channelled so-called pensions payments into general expenditure and paid out current pension commitments from the common pot.

A private sector Ponzi scheme collapses when it “runs out of suckers”, the inflow of new cash dries up, and it can no longer make payments to investors because there’s no actual capital or business at the heart of it.

With an ever-expanding aging population and a shrinking band of working-age people, over-extended welfare systems across the West risk going the same way: there won’t be enough coming in to meet the Government’s commitments and there’s no discrete fund to service them.

If the Government doesn’t find some way of bringing unfunded commitments like pensions under control, the only alternative would seem to be mass immigration – to which older voters are disproportionately opposed – or some combination of punitive tax rates on the young and an eye-watering assault on the rest of the welfare state.

This would be supplemented, as I’ve covered elsewhere, by the weaving of a social straightjacket designed to make citizens less expensive to keep.

(Another form of inter-generational inequity, from a libertarian perspective, as people who enjoyed lives of cheap beer and indoor smoking deny it to those that follow.)

All of which the young would have to endure because their elders, having mortgaged them already, have promised themselves more of their money.

There’s no easy out. It seems unlikely that the nation would actually tolerate the measures needed to accommodate our current unfunded commitments within the bounds of sensible public finance, which means that future governments are almost certainly going to bail on some of the promises of their predecessors.

Doing so will be politically difficult and will hurt people – just look at the current difficulties over the female pension age.

Whilst it will be the fairer of two horrible options, it will still not be a fair thing to do. Millions of people stand to have decades of expectations upended and face less comfortable retirements than they had planned on.

No matter that some of them may have been gullible, or incurious, or even greedy, every investor in a pyramid scheme is a victim. The guilty parties are those that create them and profit from them – whether that profit is stored in a Bermuda bank account or the nation’s ballot boxes.

Henry is the Assistant Editor at Conservative Home. Follow him on Twitter: @HCH_Hill

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The views expressed in this article are that of the author and do not necessarily reflect the views of Conservatives for Liberty