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is a growing sense of crisis in private provision as the stock
market continues to decline. Further, there is very little analysis
of the consequences of disinvestment when assets are realised for
consumption. A private funded pension scheme is in principle
an income-smoothing device which enables individuals to save
for old age. Such funds, like an individual, build up assets. Cash
savings are used to buy stocks and shares, property, or govern-
ment bonds assets that will yield an income and can be sold as
necessary. Acquisition of assets is fastest when there is most spare
cash which tends to be in middle age for individuals and in the
early years of a pension fund. Savings and assets logically reach
a peak at retirement age. A pension fund where pension payments
start to outweigh contributions is said to be mature . When cash
is needed for daily living expenses, assets are sold to provide
income. When a pension fund matures assets will be sold to
provide cash for pensions. The savings of the person driven solely
by self-interest will logically fall to zero at death.
old age and intergenerational conflict 97
For any individual the maximum rate of savings is likely to
be greatest during peak earning years, probably while in their
forties and fifties (and after child rearing). The rate of saving may
well be expected to decline starting in the sixties, and the decline
to accelerate into the seventies and eighties. This life-cycle model
of saving/pension contributions suggests fastest accumulation
up to approximately thirty years after inception of the pension
fund. If we apply this model to the bulge cohort born between
1945 and 1950, it would suggest a start to pension contributions
and saving in 1965 to 1970 with a peak in 1985 onwards to
2005 2010 when net selling assets can be anticipated (the
timing obviously depends on factors such as early retirement
patterns whereby retirement age continues to fall). The cohort
would be expected to be selling assets at age 70 in the years 2015
to 2020.
As the data from the Norwegian research shows . . . financial
capital increases at regular intervals with increased age, up until
the age of 67 79 years. Retired people do not spend their capital,
and many continue to save during their retirement. Most retired
people express the wish to help both their children and their
grandchildren and to make sure that they will inherit.35
There are considerable problems with the life cycle model of
savings.36 Most significantly this seems to stem in large part from
a desire to support succeeding generations and pass an inheritance
to children. Nevertheless, savings in the specific form of funded
pension schemes, where the fund assets are held in the form of
stocks, bonds and so on, will inevitably have to be sold to raise
cash to pay for pensions. Further the size of the pool of savings
will be related to the size of cohorts generating savings and those
consuming pensions. The demographics of the bulge generation
will mean that in a mature system, unless the smaller subsequent
generation saves even more than the current one to compensate,
the net asset value of the funds must decline. The fund s assets
must be realised to fund consumption during retirement and
98 old age and intergenerational conflict
passed to pensioners as cash to be spent on subsistence, leisure,
health and other forms of care in old age. However, as savings
push up prices on the stock market, presumably disinvestment
will bring them down, thereby reducing the value of savings and
creating a negative spiral to mirror the upward spiral of the 1980
and 1990s. In practice, the stock-market downturn in the past
two years has resulted in a push to restrict pensions benefits
the financial markets have led a number of large companies to
cut final salary schemes in favour of less certain contribution
calculated schemes.37 In mid-2002 the pensions crisis in the
popular press is no longer a demographic one but rather one of
stock-market failure.
Pension funds try to balance the risks of the stock market with
less volatile investments. Of course, less risky investments mean
lower yields and may not pay the best pensions. Pension funds
have been required traditionally to keep a proportion of their
funds in state bonds gilt-edged securities to ensure they keep
risks low and do not lose the fund s assets in speculative gambles.
This proportion varies from country to country and has a consid-
erable impact on the fund s performance. In the UK in the 1990s,
parallel to the boom in the stock market has been the reduction
in the proportion of total liabilities formed by state borrowing.
As the British government was so successful in reducing its
debt, gilts came to be in short supply. In Britain rules about how
much pension funds have to place in bonds have had to be
changed because there were not enough of them to supply the
need. Low government borrowing forces the increased volume
of pension savings away from gilt-edged securities into other
financial instruments. There has been a growing range of financial
institutions and ways in which capital may be managed and
invested. Some of these new financial tools have proved risky
and provided uncertain returns. The paradox is that pension
funds use low levels of national debt as an indicator of a healthy
economy, while needing national debt to provide a bedrock of
secure assets.
old age and intergenerational conflict 99
Social solidarity issues
Pension provision requires multi-generational social stability.
It is clear that for financial security in old age there needs to be
a readily understood, convincing ideology which makes people
forgo current consumption to fund retirement either through
savings or PAYG. Further, people need to believe that the institu-
tional social relationships will endure and future obligations will
be fulfilled it is essential that these relationships are sustained
over successive generations. The issue of social solidarity is
therefore the most fundamental aspect of securing a good old
age.
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