80. Facing the Pension Crisis

“Pensions are finished. I don’t think they have a future,” writes Michael Johnson an expert at the Centre for Policy Studies in London. Perhaps he is right, but I ask myself: what is going to replace them? There is no clear answer. All of us are experiencing a period of transition as profound as that of the Industrial Revolution two centuries ago. This time the work of human beings is being replaced by automation and robots. The full impact of this is neither understood nor accepted, but it is already deeply affecting our prospects of retirement. Half of US workers have no access to any workplace retirement plan. Only one in five enjoy the prospect of a guaranteed pension. What this means is that in coming generations most workers may end up in poverty because they did not prepare for retirement.

At present the pressures on pensions are based on the difficulties facing state and corporate bodies in Europe and the United States in meeting the gap between impending pension obligations and the resources set aside to fund them. Shifting demographics are causing retirees to live longer, birthrates are falling, and the retirement age has been rising. The politics are such that no one is willing to face up to the problem: Politicians focused on winning the next election do not want to divert taxpayer dollars toward long-term public pension funds; corporations are reluctant to take part in guaranteed pensions because they are too expensive and crimp profits; unions don’t want to draw attention to the growing deficits of their funds because benefits might be cut.1

Our perspective on pensions is still dominated by the shibboleths of 20th Century economics. Its premises no longer apply to a work force now in transition to the new digital world. Blocking reform of any kind is the private trillion “dollar” pension industry which is primarily dominated, not by concern for the popular welfare, but rather is focused on the profitability of its investments. These huge funds and trusts refuse to introduce transparency and openness into their financial operations. Governments on both sides of the Atlantic have been attempting for years to institute protection for pension investors against the hidden high fees and high risk products. However lobbying against such protective measures has been effective in blocking any such efforts.

The truth is that most of us are gambling when it comes to our own futures: We have no idea what inflation may do to our savings, how long we shall live, or how much we will need to live on. Inevitably, upon retirement, we may well be left to fend for ourselves. Trying to avoid this may lead us to take long term risks. The problem is that there is no overall planning to protect us as we head towards retirement. The piecemeal efforts to provide pensions for the electorate which were put in place over the past 100 years are now coming apart at the seams.

Pensions as a way to provide for the welfare of aging workers originally were established through makeshift social legislation in Germany towards the end of the 19th century.2 It was the statesman Otto von Bismarck who pushed through an Old Age Pension program in 1889, financed by a tax on all workers who would then benefit when they reached the age of 70. This marked the entry of the state into large scale pension funding. As the labor movement in Europe gained strength with the industrial revolution, so did the expansion of state pension programs.3 In the United States, Federal pensions were offered under the Civil Service Retirement System formed in 1920. This provided retirement, disability and survivor benefits for most civilian employees working for the Federal government. The US continued to be the driving force behind pensions during the four terms of FDR’s presidency when the Social Security system was established. Programs such as these remained popular throughout most of the 20th century.

Company pension plans in the US slowly became popular during World War II when wage freezes prohibited increases in worker’s pay. Corporations began to push for defined contribution benefit plans in the 1950s and in a period of persistent growth became the most popular type of retirement plan by the 1980s. In such defined contribution schemes, employees also were dependent on contributions from the private sector (corporations). These usually equaled employee payments which were then placed into tax-sheltered accounts. Such funds were intended to become large enough to support those entering retirement. The trouble with these paternally supported plans was that some employers surreptitiously altered the complex benefits and added on charges so that the investment returns were far lower than workers were told to expect. A large part of the work force involved in the contribution benefits managed by the employers were kept in the dark regarding the varied investment schemes. Nevertheless, public sector pension plans in the US now hold more than half of their assets in equities.

Initially defined benefit plans were more popular than defined contribution plans: Today 67 percent of unionized employees are covered by defined benefit plans as opposed to just 13 percent of non-union workers. But defined contribution plans now cover about 70 percent of all pension holdings despite the fact that the lifetime fees of the American household contributors exceed $150,000 and may erode a third of their total contributions. Significantly, researchers have pointed out that employees save more if they are enrolled in savings plans where they have the option to drop out.

From the start, the number of US Social Security program recipients has continued to grow markedly with the value of unfunded obligations rising into the low trillions of dollars. The crisis represents the gap between the amount of promised benefits and the resources set aside by the government to pay for them. As a result, millions of Americans may face a sharp decline in their living standards when they eventually do retire. For many, only Social Security will protect them from penury. Three American academics have thoroughly examined the US problem in their book, Falling Short: The Coming Retirement Crisis. In my opinion, their studious but conventional approach falls short in terms of imagination, innovation, and a more global perspective.4

The pension experience of the United Kingdom runs somewhat parallel to that of the United States. In the UK, the start of the modern state pension was the Old Age Pension Act of 1908 which provided 5 shillings a week for those over 70 whose annual income did not exceed £31.50.(To get the idea of their value in today’s money one has to multiply these figures by more than 150!) Such were the first steps in the welfare reforms of the Liberals leading to the completion of a system of social security with the National Insurance Act of 1911. Following World War II the National Assistance Act of 1948 abolished the medieval poor law and gave a minimum income to those not paying national insurance. In the early 1990s the existing framework for state pensions were strengthened by the comprehensive statues of the Pensions Act of 1995. Then, in yet another update of the state pensions, the Pensions Act of 2007 raised retirement ages.

Although the rates between providers in the private sector varies greatly, a typical UK pension pot of £100,000 will buy a married man of 65 an annual return of £4,500. With annuities, in which individuals swap their holdings, such as shares, houses, or pension pots, for regular monthly sums throughout their forthcoming retirement. Such annual returns average 7.6%. Until the Conservatives came into power in May 2015, pension plans were a form of “deferred compensation” because these were vehicles which allowed for tax free accumulation in funds for later use as retirement income. However, such benefits are being reduced by the new administration.5

I see the pension system of the Netherlands as the best role model for most European and American communities to follow. Their mix of public and private provisions guarantees that everyone aged 65 and over enjoys a decent standard of living and is assured it will continue to do so.6 In per capita terms, Holland has one of the largest pension reserves in the world. Under the Old Age Pension Act (AOW) entitlement under this Act is accumulated at the rate of 2% for each year of contribution which leads to a 100% entitlement to the relevant pension benefit upon reaching the age of 65. For the non-state pillar of this system, employees annually accrue equal pension rights for each year of service which, in most cases, amounts to about 2% of their salaries. Here there is mandatory participation, collective risk sharing and ways to transfer pension value. A clear and transparent division of responsibilities is maintained between the employer, the employee and the pension provider. By the end of this year just over 3 million people will be receiving their Dutch benefits amounting to over 40 billion Euro, but what the entire system offers, and other countries fail to provide, are clarity and transparency.

A number of other small countries are instituting “social pensions” as a way out of the varied risky schemes. These are tax funded monthly cash transfers paid at retirement age. Universal programs which provide pensions regardless of assets, employment record, or income include New Zealand’s Superannuation, and in Mauritius by the Basic Retirement Pension. Other states, such as Singapore, have instituted means-tested pension payments. Even the US has introduced a form of “social pension” with a Supplemental Security Income. This would seem like a humane direction for such pension systems around the world that may soon be unworkable.

To my amazement, no in-depth policy studies have broached the subject of taxing robots as one way to provide the state more money to pay to retired workers. As robots and automation are steadily increasing their ability to replace workers, the number of available jobs (and the taxes these produce) will decrease. The smart resolution ultimately would be to place annual taxes on each operating robot to balance the pension books of most states. Of course corporations would lobby fervently against such a tax.

This means counter-lobbies funded by unions, city and state councils, and financial investment groups would have to be established at both national and global levels. Endorsement, however, should come from prominent advocates of all political persuasions. Such an approach needs proper examination as currently many governments support the production of machines like cars and new robots, but ultimately tax only the former.7

A tax on robots also could tax industrial computers used by the insurance industry, accounting firms, and other groupings who continue to replace workers with complex new machinery. The taxes collected should be distributed (or invested) for workers being laid off by companies introducing robots or those unemployed without social security and those over 65 who have no retirement pensions nor savings.

The tax could be based on how many hands would be needed to do the job which the robot displaces. Truckers, for example, would be one for one. A percentage of the pension tax which truckers pay when working a ten hour day would probably be under 6% of their wage and over 2% of their current pension contribution. On the other side of this equation, corporations caught evading their robot tax would be heavily fined.

Capitalism was built on the back of cheap labor (not to mention slavery) and now is being supported by investment in robots to replace this historical work force. Multi-national corporations could be among the first to be challenged by a drive for the global taxation of robots. These would also present the fiercest opposition. However, the welfare of those facing retirement — that is all of us — need to have the assurance that in the years ahead there will be funds to cover our well-being. Taxing robots could help to provide such coverage.

TAX the ROBOTS! should therefore become the popular slogan for tomorrow.


1Greg Smith, “It’s time to eliminate the confusion in personal retirement accounts” Time, June 22, 2015, p.22
2Widow’s funds first appeared in Germany in 1645 and another fund for teachers in 1662.
3President Obama has observed: “It was the labor movement that helped to secure so much of what we take for granted today. The 40 hour work week, the minimum wage, family leave, health insurance, Social Security, Medicare, retirement plans. The cornerstones of middle-class security all bear the union label.”
4Charles Ellis, Alicia Munnell, and Andrew Eschtruth, Falling Short, (2014)
5John Gapper, “Politicians are intent on pillaging your pensions,” The Financial Times, April 18, 2015
6Dutch Ministry of Social Affairs and Employment (June 2008, publication number SWZ 74R610)
7Nicholas Colin and Bruno Palier, “The Next Safety Net”, Foreign Affairs, July/August 2015, p.29

1 thought on “80. Facing the Pension Crisis

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s