(Next Magazine, 2016/1/14, A002, Second Opinion, Bill Stacey)

Universal pension, universal failure

Hong Kong became the prosperous success that it is today, precisely because we avoided the depredations of the welfare state established across the western world in the post war period. Without commitments from government to provide universally for the essential needs of Hong Kong people, taxes were able to remain lower, controls on people’s lives less, traditional bonds of family stronger and self-reliance greater. We should be under no illusions, not having an extensive welfare state has been an essential part of our freedom, and changing that corrodes liberty.

It is puzzling that people who in other spheres pose as champions of freedom, advocate a universal pension scheme that wherever adopted has started the process of creating an extensive administrative state. Such advocacy ignores the lessons of history and is eerily similar to the original debates in the west that made promises yesterday that are unsupportable today.History shows us that in every country that instituted state pension systems, those schemes proved less fiscally sustainable than initially thought, required higher taxes than when implemented and still resulted in a growing burden of debt for future generations. Moreover, in most countries the growing expectation of the young is that these systems will break down and not be sufficient to sustain them in their old age.It is admirable that there is still a kernel of prudence behind the Hong Kong debate that wants to have a funded pension scheme, putting aside money now and plans to raise new money that would allow commitments to be paid for. We can prepare clever models showing how funding might work. Yet in practise pension schemes, particularly of the universal kind, have never been sustained within their initial projections.

The reasons why projections fail are embedded in human nature, politics, demographics and economics. Human nature means that once government promises to provide, behavior changes. People take less precautions in their savings, provide less for their parents and rely on those promises. The more universal the pension, the greater that reliance and the more behavioral change blows out costs. Politics ensures that promises will be excessive, new promises made and problems ignored when they arise. You might think that the hi-speed train project is a fiasco with missed deadlines and blown out budgets. Why would we ask the same organization that cannot run such a complex project to be responsible for the support of our parents? Demographics has sunk pension schemes. As people live longer, the cost of pensions is higher. As a result, retirement ages are being pushed back, but nowhere enough to make pensions sustainable.Funded pension schemes rely on economic assumptions about investment returns. We can see across western countries that these assumptions have proven far too optimistic, pushing the burden of funding from this generation to the next. The costs of running pension schemes grow and the bureaucracy created to run the scheme gets out of hand.

Even if a scheme is adequately funded, we need to fear the control over the pot of money dedicated to that funding. As the ultimately trillions of dollars pile up from returns, the pension honey pot becomes a very tempting proposition to raid. Initially those raids might be in the form of contribution holidays, later in mandatory purchases of government bonds to fund other priorities and ultimately using the tax system to confiscate more of pension entitlements and retirement savings.Universal pension schemes are never true to label. They become less universal over time, they become more costly, they increase taxes and they are inadequate to care for our elderly. They create plaques and tangles in our economy that reduce our productivity and the means to support our elderly. They hand more power and resources to governments and create intergenerational conflict. Moreover, they are not necessary. Left to their own devices, the vast majority of people can look after themselves and their families with prudence, adaptability and knowledge of their own circumstances that governments will never have.

Bill Stacey