Pennies before heaven

Mention pensions and the reaction is likely to be a groan or glazed eyes. Yet pensions arouse strong passions. They are high on the political agenda with Labour's welfare review. What has been lacking is a balanced and comprehensive assessment of alternative ways of providing pensions. Richard Disney's book provides no easy answers, but gives a detailed and readable account of the pension provision debate from an economist's perspective.

Ageism is evident in media reports of the "grey time bomb", in which the growth of the older population is portrayed as creating an increasingly unaffordable burden on society, through the cost of public pensions and health care. This alarmism has become part of our everyday repertoire. Disney elegantly demonstrates the fallacy of such portrayals, arguing that there is no "crisis of ageing". He shows that trends in the cost of social security pensions are driven primarily by changes in employment participation rates, unemployment levels, and the real value of pensions, rather than any underlying demographic factors. There is considerable scope for flexibility in tax policy and no inevitable increased public pension burden.

The case studies of other countries provide a sobering counter to the British situation. The future public pensions "burden" in Britain is much lower than in other countries, both because of the relatively small projected increase in the older population and because of changes in social security legislation. Disney gives a clear account of the fundamental changes in pension legislation in the United Kingdom over the past 20 years, which have reduced the value of the state pension and Serps pension entitlements.

Britain has moved towards income-tested benefits as a means of limiting social security expenditure, with over a third of pensioners now receiving income support. The value of the state National Insurance pension is about Pounds 10 per week below the means-tested income support level and half of pensioners have no occupational or personal pension. Disney shows the perverse incentives of means-tested pensions. They will result in behavioural distortions and adverse effects on savings and the structure of the capital market.

At times Disney's economic assumptions need to be softened. For example he states, "a person who has retired from the labour market is a 'burden' on society in the specific sense that his current consumption expenditure outweighs his current contribution to the total marketable output". Older people's contribution should not be seen purely in terms of waged labour, but must also embrace their contribution in providing childcare to enable their daughters to work, providing care for other older people, involvement in voluntary activities and other organisations which enrich our society.

Disney appears gender blind to the wide pension differences between older men and women. Half of women over 65 are widowed and only a third of older women have any kind of pension other than the state pension. Disney states that 75 per cent of workers can expect to retire with an occupational or personal pension; this is true for men, but not for women. Only a quarter of older women reach 65 with an occupational or personal pension. This will not be very different when women in their 40s reach retirement age. The pensions trap particularly hits women - many low paid and part-time workers pay into a pension, but will be no better off because their small pension only brings their income up to the means-tested income support level.

A big change over recent years has been from pension systems with "defined benefits", such as most occupational pensions and Serps, to pension schemes based on "defined contributions". Disney shows that the latter have major disadvantages because individuals do not know the value of their final pension, women receive lower pensions because their greater longevity reduces the value of their annuity, and the increasing power of pension companies. The assets of private pension companies were 55 per cent of GDP in 1990 and are now considerably higher.

The Conservative government encouraged the growth of private pensions, by providing generous tax rebates to induce employees to contract out of Serps. Disney shows that this represents the loss of billions in revenue when comparing forgone payroll tax contributions with projected savings on Serps. However, even with the very generous government subsidy of private pensions, employees are better off contracting back into Serps at age 51 than stay in a private pension.

A generation of younger men and women are being squeezed from both directions. This "transition generation" are expected to pay for their own private pension while paying for the pensions of the older generation through PAYE. They will lose out because by the time they retire their state National Insurance pension will be virtually worthless, unless the government pensions review produces a change of direction.

Disney's book provides a balanced and scholarly economic analysis of the costs and benefits of alternative ways of financing the later years of life. It is recommended reading for all interested in pensions and in the well-being of ourselves and of future generations.

Sara Arber is professor of sociology, University of Surrey.