THE PRICE OF LIFE
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The roots of Britain's so-called "pensions crisis" stretch back to the end of the Second World War, when two great British institutions were established - the NHS and the state pension.
The universal state pension, as originally put forward by Beveridge, envisaged a Superannuation Fund to which employers and employees alike would be compelled to contribute. From it, pensions would then be paid to the retired. But Beveridge was aware that, initially, the fund would be tiny, and could not afford to pay living pensions to all. So instead, he envisaged a "golden staircase"...a period stretching twenty years into the future...during which a gradually swelling fund would be able to disburse increasingly generous pensions.
However, for Ernest Bevin and others in the post-war Cabinet Committee on Reconstruction Priorities, the suggestion that those nearing retirement - who had suffered through the Depression and two world wars - should yet again "lose out" proved an impossible political pill to swallow. Instead, it was decided that a state pension would be paid in full, to all, from the outset.
To achieve this feat of financial self-levitation, the British government resorted to political sleight of hand. The electorate were told that their compulsory contributions were being paid into a Superannuation Fund - but, in reality, the Fund was never established. Instead, the compulsory contributions were siphoned off to pay the pensions of those who had already retired.
This wheeze remained undisclosed and undetected for decades, although fatally flawed. For the vast majority of those who survived to collect their pension, retirement proved an all too brief interlude between graft and grave, and contributors greatly outnumbered pensioners. Indeed, for many years, the imbalance between those making contributions and those drawing pensions proved a nice little earner for the Exchequer.
All might have been well - and indeed might still be well - had it not been for the birth of the state pension's social sibling, the National Health Service.
The NHS, dreamt up at a time when the nation's economy had been, quite literally, flattened...our industrial centres - and many of our hospitals - reduced to rubble...and the people exhausted after six years of war...was a truly heroic concept. Yet it succeeded mightily, perhaps even beyond the hopes and dreams of its founders.
In 1931, life expectancy at birth in Britain was just 58 for men and 62 for women. By 1961, despite the damaging effect on the nation's physical and mental health of six years of war, and even more years of poor diet and inadequate housing, life expectancy had risen to 68 and 74. By 2001, it had risen to around 76 and 81. In the space of seventy years - a single lifetime - the life expectancy of the entire nation had been raised by over 30%.
To be sure, improving standards of living after WWII played a significant role. But to the politicians who had the vision, skills, energy and tenacity to bring the National Health Service into being - and to the medical profession whose dedication has made it what it has become today - all of us owe a profound debt of gratitude...for we have been given the priceless gift of life itself.
Unfortunately, what we seem to have failed to grasp is that, although life may be priceless, it is very far from costless. We have been given almost twenty extra years of life expectancy, but none of us has extended our working lives by even one week. We now expect to live twenty years longer than our grandparents did, but we do not expect to work one day more than they did - our twenty extra years should be ones entirely of leisure.
Well, just who do we think will pay for all that?
Three possible options have been proposed. The first - to save more during our working life - is a non-starter, since we belong to a society that has already demonstrated it is not prepared to voluntarily save more. Indeed, as awareness of the pensions crisis has risen, our national savings rate has actually declined.
The second option - to extend our working lives - would probably be viewed by many as the least unpalatable option. However, without a significant expansion in the jobs market, there would be a real risk that raising the "official" retirement age would result simply in converting means-tested state pension benefits into rather more generous unemployment benefits. Tens of millions of young, industrious and increasingly skilled people are already queuing to join the global employment market, almost all of them prepared to provide their skills and labour at rates of pay far beneath the legal minimum in this country.
The more likely reality in the UK is that, for rather more years than politicians would care to admit, both employees and employers in the private sector will be required to contribute increasing amounts towards their own relatively impecunious old age, while simultaneously paying higher taxes to fund the rather more comfortable retirements of those in the public sector. In short, we may all be about to discover that the price of life is high indeed.
Jan Luthman
Editor's Note: This essay was adapted from The Daily Reckoning.
A graduate in civil engineering, Jan Luthman spent 18 years managing the Middle Eastern and African subsidiaries of various US and UK multi-nationals. He returned to Britain and changed career in 1987. Today, he is Head of Research and AAA-rated Fund Manager at Walker Crips Stockbrokers in London.
