Dear Prudence

Martin Daunton

  • Banking on Death or, Investing in Life: The History and Future of Pensions by Robin Blackburn
    Verso, 550 pp, £15.00, July 2002, ISBN 1 85984 409 X

The trend in most industrial societies is away from the public funding of pensions and towards private, commercial provision. Robin Blackburn describes the finance companies selling pension schemes as a new form of tax farmer, offering dubious deals in return for tax subsidies and lavish commissions. The analogy indicates the tenor of his thinking: tax farmers contributed to the lack of legitimacy of the Ancien Régime. Might discontent with returns on pensions, a growing sense that we have been cheated or at least misled, lead prospective pensioners to rise up and reject the delusions of Reaganomics, Thatcherism, Blairism and the World Bank? If Blackburn is to be believed, pensions are the Achilles’ heel of capitalism.

Despite the subtitle of his book, Blackburn is concerned more with the current crisis and its resolution than with the long history of pensions. He identifies two pension traditions, the ‘puritan’ and the ‘baroque’. The first, which stresses prudence, thrift, individual morality and self-reliance, was typical of commercial and financial oligarchies from 17th-century London to 20th-century New York. The second emphasises the pastoral role of the state and its duty to create social harmony and exalt hierarchy through ‘a well-ordered public space and beneficent, universal public power’. These ideas had their origins in absolutism; they resurfaced in different forms in the social republicanism of the French Revolution and, especially, in the authoritarianism of Bismarck’s Germany. At present, the trend is away from the baroque tradition, though the new Anglo-Saxon model is not simply a revival of the puritan tradition: in modern systems of pension provision the notion of probity and self-reliance is undermined, in Blackburn’s view, by a ‘commercial colonisation of private life and fragmentation of the public sphere’.

Historians of political thought, with their concern for liberty, representation and other such issues, have curiously little to say about the attitudes of states to entitlements – it is a subject usually left to economic and social historians, who are concerned with responses to distress and poverty but not particularly interested in theories of the state. Yet the question of social entitlements can tell us a lot about the nature of the state and the character of social relations. Should assets be transferred from rich to poor, from young to old, or simply across an individual’s own life? Should the solutions and institutions be private or public? Should the cost be covered by compulsory taxes or left to private initiatives, possibly encouraged by tax incentives?

At one extreme are systems of relief dependent on a family’s assets – a farm, say, or a workshop. Rather than thinking of a smallholding as a way of maximising cash income and using labour in the most efficient way, the family might use it to support as many family members as possible, at the expense of productivity. Early modern states held that the elderly were the responsibility of their relations. In England, the Poor Law of 1601 stated that ‘the father and grandfather, mother and grandmother and children of every poor, old, blind, lame and impotent person, or other poor person not able to work, being of sufficient ability, shall at their own charges relieve and maintain every such poor person.’ In theory, this obligation continued into the middle of the 20th century; in practice, most workers’ families used their minimal resources to support their children, leaving elderly parents in the hands of the tax-funded Poor Law. The curious fact that England, alone in Europe, developed an inclusive, universal poor law cannot be explained with reference to the puritan and baroque traditions. It was due instead to the early emergence of wage labour and commercialisation, but also to the gradual transformation of the parish into an agency of civil government with the power to raise taxes. Generosity varied around the country: in at least one parish in Yorkshire, the poor were stoned by taxpayers on their way to church. Although the Poor Law of 1834 tried to impose more responsibility on families, the workhouses it introduced became old people’s homes and geriatric wards.

British colonies either inherited the English Poor Law or decided to reject it. In Canada and New Zealand it was abolished; in Australia, it was never adopted. New Zealand still expected the burden of supporting the elderly to be taken up by their kin, but now defined kin far more widely than in 1601. This had the potential to annoy distant relatives asked to cough up the money, while direct heirs were liable to resent the hold of their parents or grandparents over family assets. Such tensions were resolved in 1899 by the introduction of old age pensions, financed by a new income tax. Britain followed suit in 1908 in response to a different problem: how to shift the mounting financial burden of the Poor Law from local property taxes to the central state. Financing pensions by means of income tax ran the risk of being politically divisive, since it would be redistributive. The alternative was social insurance (Bismarck had introduced such a scheme in Germany in 1889), with a flat-rate contribution from employers and employees, and possibly a state supplement. When the US introduced old age pensions in 1935, the principle of contribution was adopted – and pensions were initially paid out only when an individual had made enough contributions to cover the cost.

Provision by employers or private commercial concerns had developed before, and then continued alongside state pensions. Employers sometimes adopted informal or paternalistic approaches, paying a small pension, building almshouses, or retaining old members of staff on the payroll well beyond their usefulness. (Many employers welcomed state pensions because they made it easier to lay off inefficient workers.) During the 19th century, the Post Office, railway companies, banks and other large concerns offered pensions as a form of deferred salary: employers wanted to preserve a disciplined, non-unionised workforce and to maintain some control over workers who could not be under constant supervision – awarding a pension in exchange for long and loyal service had many virtues. Increasingly, company schemes entailed contributions by both employer and employee, and were often run by large commercial insurance companies alongside individual life insurance or annuities encouraged by tax breaks.

In any country, at any time, the pension system is a complex and constantly shifting mix, determined by demography, economic structure and patterns of ownership, the strategies of employers, the capacity of the state, the electoral calculations of politicians, and changing ideologies concerning the appropriate limits of the market. Pensions also reflect attitudes to personal gratification and the future. Only readers close to pensionable age will remember the advert showing a callow youth gradually passing through the ages of man. Thinning hair and drooping jowls were alarming enough; still more shocking was the growing realisation that failure to invest in a pension scheme was leading to a life of penury and despair. Pensions encourage prudence and deferred gratification. In Blackburn’s words: ‘They sacrifice the present to a remote future, and spontaneity to calculation.’ As recent events have shown, however, prudence does not always pay. A far-sighted young woman who started saving for a pension with the Equitable Life in the 1960s is now retiring much poorer than she ever had reason to expect. We might think that the state has a commitment to provide a reasonable pension in old age, or that employers should offer a good company pension, but can we trust them not to renege on the deal? In public systems funded by taxes and insurance contributions, our future pension is financed by those currently at work, not by our own payments. How do workers know that this arrangement will last until they retire? And how do we know that companies, hit by deficits on their pension funds, will not revoke their promises or even go bankrupt?

There are various ways to increase the credibility of pension schemes. The American scheme of 1935, for example, was run by an independent professional body, the Social Security Administration, with an obligation to prevent political patronage – the curse of the Civil War pension scheme – as well as to protect the scheme’s financial viability and to propose improvements. The existence of the SSA has limited the erosion of public pensions in the United States; in Britain, there is no such independent body. Blackburn is concerned above all that the development of commercialised provision gives the pensioner little or no voice in the control of his pension fund and its future value. Far from creating a form of popular capitalism, or even what Peter Drucker has called ‘pension fund socialism’, modern funds are not controlled in the interests of beneficiaries, and profits and tax subsidies enrich the fund managers employed by the leading banks and finance houses. In Britain and in the US employers have moved away from Defined Benefit (DB) schemes (which pay out a certain proportion of a worker’s final salary) to Defined Contribution (DC) schemes, in which the final pension is left to the whim of the market. When markets were moving inexorably upwards, many welcomed the change, hoping to share in the surge in equity values and, in the case of American schemes, to cash in some of the benefits. Pensions were no longer prudent; they were speculative. The slump in values has meant that the future has not turned out as expected, and although workers might like to return to defined benefits, most firms are abandoning final salary pension schemes because they are seen as too expensive. Meanwhile, pre-funded and publicly delivered universal pensions are in retreat, and state pensions are declining in real terms.

Blackburn’s account of the last twenty or so years is detailed and compelling. If there is no sudden and swift improvement in equities, many people will find themselves very hard up when they retire. Politicians need to find solutions to this crisis, and Blackburn’s final chapter offers a set of proposals. Unfortunately, they mark a triumph of wishful thinking over practical politics.

In Blackburn’s view, the Anglo-Saxon model of pension provision has two failings: it neither provides adequate pensions, nor accumulates sufficient national savings. His solution is a state pension, of at least 40 per cent of average earnings, offered to everyone regardless of their level of contributions, and a secondary scheme that would make up a further 30 per cent of average pre-retirement income, with the state contributing on behalf of those who can’t afford to make their own payments. Such a scheme would involve much higher rates of taxation or social insurance contributions, and Blackburn simply assumes that there is scope for this. What makes him think so? The only real hint is that ‘insecurity now afflicts the better-paid as well as the low-paid.’ But to move to a universal, inclusive pension would require a major transformation in social attitudes and economic structure. Besides, he accepts that taxation alone is not enough: for the retired to receive 70 per cent of average earnings, 17.5 per cent of national income would need to be channelled into pensions – about half of total public revenue.

Tax revenues would, he argues, need to be supplemented by special levies. Pre-funding of pensions could be achieved by requiring corporations to issue new shares at the rate of between 10 and 20 per cent of annual profits. Rather than paying shares into a company scheme which makes pension holders dependent on the success of a single firm, employees would pool their assets so that the fund would be kept distinct from any individual company. The administration of the share levy by regional pension boards would mean that local communities would gradually acquire a large proportion of corporate assets: the schemes would not be state administered, creating passive clients, or run for profit by commercial groups. The result would be, in theory, to raise the rate of economic growth – pre-funding creates a pool of assets, thus allowing economic decisions to be made on a long-term basis. Secondary pension funds would be answerable to their members and to the community and would invest not in global corporations but in the diversification of the regional economy. The regional boards would be autonomous, and individuals could register with three funds, linked perhaps with their college, their job and the town they lived in. This would reactivate civil society, control the anti-social power of finance capital and reduce vulnerability to globalisation. In addition, any increase in commercial site values created by public investment could be taxed.

These proposals bring two names to mind, Henry George and Sidney Webb, and neither offers much hope. In the late 19th century, Henry George suggested that society could be transformed by a land tax on value exclusive of improvements, which would capture unearned increment or economic rent and hand it to the community whose enterprise had driven up values. David Lloyd George tried it in his People’s Budget of 1909, in part in response to the fiscal difficulties created by the cost of old age pensions. It failed, and was abandoned after the First World War. But the idea of rent was taken up by Webb, who, at the end of the war, proposed – and the Labour Party adopted – a levy on capital, a once-and-for-all tax on capital assets, which would redeem the National Debt and transfer shares to the state, to local authorities and to co-operatives. Society would be transformed and capitalism wither away. In Webb’s imagination, the salaried middle class would rally to support the policy against financiers who received vast amounts of interest on the National Debt at the expense of workers. Unfortunately, the salaried middle class preferred to side with their fellow property owners and Stanley Baldwin’s language of popular capitalism won the day. Is there much chance that the outcome today, with still wider property ownership, would be any different? And why would the trustees of community pensions funds be any more successful than today’s fund managers? Workers in Corus, the steel firm, have seen their jobs and pensions disappear – would investment of the funds in Scunthorpe, where the firm is based, really have produced a better outcome?