Should we have Pensions?

Posted on March 21, 2012 at 11:23 am,

This is the latest in our series of posts critiquing Wayne Grudem’s book Politics According to the Bible. Today we’re looking at the section on what the Americans call Social Security. This scheme covers old age pensions, sickness and disability benefits, and healthcare for the poor and the old. It’s the US equivalent of the UK’s welfare state (although it covers far less). It’s paid for by mandatory insurance payments (similar to the UK’s National Insurance payments), which is collected as a percentage of income (although earnings above a certain level are exempt). Healthcare is dealt with separately, so this post will deal with what Grudem says about benefits and the cost of them.

The Pensions Time Bomb

Grudem starts by outlining the history of the US Social Security scheme, which goes back to 1935 (the UK started paying out old age pensions several decades earlier). He points out that the scheme, as currently set up, is projected to start paying out more than it receives in by 2016, and to run out of money in 2041. He also claims that the rate of return on a private pension is far higher than the rate of return on a state pension, and supports claims that gradually privatising social security would solve the problems.

Grudem’s Approach

Grudem starts by pointing out a philosophical problem with the system, that it is – to a large extent – paying healthy, potentially productive people not to work. He cites 1 Thessalonians 4:10-12 and 2 Thessalonians 3:6-12 as Bible passages which establish the principle that those who are able to work should do so. He goes on to claim that the system, as set up, is deceptive – your contributions go towards paying today’s pensions, rather than being invested to pay your future pension. Grudem characterises this as a massive transfer of money from hard-working people to non-working people, many of whom have no need of it.

On the other hand, he does say that it is right for government to provide some form of support for those who are no longer able to work due to old age, disability, or involuntary unemployment. It isn’t clear why he thinks that the state should have this role, but not the role of paying out universal pensions. In addition, he supports the idea that people should be able to take partial payments and only semi-retire.

He also claims that there are several benefits of privatising the system. Firstly, he claims that it would bring the system back into financial solvency. Secondly, it would increase individual liberty and responsibility. Thirdly, it would decrease government power. He claims that the reason that the Democrats and some Republicans have blocked the reforms he wants to see is because they see it as a means of retaining and increasing government power. He insists that this is often a primary but unspoken goal of those who seek to increase the power of government.

Is he right?

Firstly, I should note that Grudem’s comments about the motivations of politicians who want the state to play a big role in the economy are a potentially libellous straw-man caricature. He’s right in saying that, for some politicians, it is a matter of political survival, but since Grudem believes Democracy to be the best form of government, that shouldn’t be a problem. But ignoring the question of how popular anything is, nobody actually believes in increasing government power for its own sake. For most, it is because they see the state as the best institution for solving the problem. For others, it might be about making their mark on history. Others may be on an ego trip. But in all cases, increased government power is a means to an end, rather an end in itself.

Furthermore, by characterising the pursuit of a more powerful government as an unspoken goal, Grudem is attributing motives based on pure supposition. Finally, the exact same argument could be levied at politicians he does support. There is something of an inconsistency between small government rhetoric on economic issues and arguing for increased government intervention on social issues – which is precisely the combination of policies that Grudem is arguing for throughout the book.

On the issue in question, though, Grudem is right that the old age pension is a modern innovation that doesn’t have any Biblical support. In most societies throughout history, the old and infirm have been cared for by their families. But in our modern industrial/post-industrial society, the institutions that used to take care of those people have been very much eroded. The extended family has been replaced by the nuclear family, and even that has been seriously eroded over the last few decades – broken families (where the parents have split up) have become normal, and other social institutions – of all kinds – have become weaker. In such a society, it’s no wonder that this function has been institutionalised. The state is the only institution which has the ability to pick up the pieces across the whole of society.

The main question, therefore, is whether the current model of caring for these groups is both practical and sustainable. The main problem with pensions is demographics. The “baby boom” generation was significantly larger than the one before it, yet had proportionately fewer children. Because the pension age was not raised over time, and because modern medicine means that people are living longer, that means that more money needs to be paid in in order to pay out decent pensions. The same problem would apply if the money was invested privately. Whether the income comes from taxation or dividends on investments, the money that is paying for pensions ultimately has to come from the work done by the people who are still of working age. Grudem may or may not be right in saying that there would be more money in the pot if pensions money were invested privately, but the demographic problem would not be entirely eliminated.

The solution of allowing individuals to invest their pension contributions privately also brings up two other problems. Firstly, it would likely make the existing state pension system insolvent more quickly. Fewer people would be paying in, but the number of people claiming their pension would still be going up as the Baby Boomers retire. Secondly, what happens if and when some of the private investments go bust? In the 1980s, the Maxwell pension scheme famously went under – those who had contributed lost their entire investment. In such cases, the government would have no option but to support these people. Even if the system is privatised, the government would still be bearing all the risk.

It’s also worth noting that old age pensions do have some positive social effects. They allow pensioners to undertake voluntary work that would not be possible if they were still in full-time employment. They do not prevent people from taking up part-time jobs that are compatible with their age and health (and in some cases, retirement age prompts them to do just that). Given that our economies have structural unemployment (there simply aren’t enough jobs to go around – sometimes not even when we’re in the middle of an economic boom), they do help ease the problem of unemployment. Finally, whatever solution is found for the pensions problem, it is unthinkable that pensions would be withdrawn from those already claiming them. In order to be considered politically viable, any solution must include continued government support for existing pensioners.

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