The Real Pensions Crisis: the Problem of Surplus Capital Absorption
We are told today that we face a crisis. People are living longer, there is a demographic timebomb and, coupled with need to bring down deficit, we have no choice but to accept reductions in our pensions, the need to work longer, contribute more and get back less in the end.
In reality, none of this is true. As with reforms to tertiary education, welfare and the health service the government is simply using the excuse of the financial crisis to launch an attack on working people and the public institutions and frameworks we have built for ourselves over the past half century and more.
Currently 31% of people in the UK are of state pension age or older; this is projected to reach 34% by 2050. But this increase comes not because we will all live longer in retirement, but because more of us will reach that age. It’s predicted, by the ONS, that life expectancy at 65 will have increased by 3-4 years, compared to today, by 2050. If pensionable age increases to 68 for both men and women, we will, therefore, spend a smaller fraction of our lives as pensioners then people do today.
Pensions are, by their very nature, a long term issue, the deficit, by contrast, is a problem for the medium term — or even, in the government’s view, for the short term. Under the current system, as reformed by Labour in 2007, total pension and benefit payments by the state will increase from 6% of GDP to 6.8% between now and 2035 (figures from 2007 DWP report). Hutton’s review of pension arrangements is even more positive about the state of public sector pensions, stating that their cost, if nothing is done, will actually decrease as a proportion of national income, from 1.9% now to 1.4% by 2060; that data falls within a range, but even at the upper end of the projections the cost will be less than at present.
Though the government’s case is not convincing, however, there is a real pensions crisis approaching, just not the one we’re being told about. All the predictions quoted above rely on an expectation of compound growth of around 3% per annum. Put simply, if I want to save for my retirement money I put aside has to grow. If it didn’t and I wanted to work for 40 years and spend 25 in retirement and receive my career average earnings during that period I would need to set aside around 38% of my income. A completely unaffordable figure for almost all people. If, however, my contributions could be invested at a real return of 3% p.a. I would need to save only 20%, at 5% real return I would need around 11% contributions and at 7% return only 6% contributions.
The real question, then, is what growth rate can we realistically achieve, not just in the short term, but consistently over the next 40 years from now till my generation retire.
So what is a realistic rate? Over the whole course of capitalist history, approximately the last 200 years, growth has averaged about 2.25%, during the post-war period from 45-73 it was higher, close to 5%, and over the 20 years till the credit crunch around 3%. Take that as a base figure to work from. What does that mean in real terms?
The global economy is now valued at a bit over $50tn, which means we need to grow by around $1.5tn a year. By 2030 the economy will have doubled in size, so we’ll need to find space for $3tn of investment. And by the time I hope to retire around 2050 it will have nearly doubled again, requiring over $5tn of investment. Where do we find the space within the global economy to absorb that amount of capital every year?
Historically the global capitalist economy has been able to grow by physically expanding its boundaries. Moving first out of the industrial heartlands of Britain across Europe and North America and on to South America, Asia and Africa. But while there is some space to expand in China, South Asia and Africa most of the world is now already within the sphere of capitalist development. We cannot see further growth by physical expansion, at least until we start to colonise other planets.
On the other hand, growth in developed countries has, over the past 30 years, come from a combination of ever increasing demands for materialist consumption, fuelled by a massive increase in private, household debt and the inflation and re-inflation of asset price bubbles. We’ve seen recently the effects of an economy built on such foundations all too clearly, yet it appears as if the only way to maintain progress under our current system is to push even faster down this path. This clearly cannot be sustainable or the basis for any long term plan for the economy.
At this point critics might point out that new technology will be our saviour and allow us to grow indefinitely. Ecological limits can be overcome by new green technologies and renewable and nuclear — fission and eventually fusion — power can provide us with virtually limitless energy. Human ingenuity is boundless and with enough energy all other constraints can be overcome.
And that might well be true, but ecological limits are only one barrier to capital accumulation and growth, perhaps one that anti-capitalist left has focussed on too exclusively in recent years. As David Harvey puts it in The Enigma of Capital
there is always a danger in overemphasising supposedly ‘pure’ natural limits a the expense of concentrating upon the capitalist dynamics that force environmental chance in the first place and on the social (particularly class) relations that drive those dynamics in certain environmentally perverse directions. The capitalist class, it goes without saying, is always delighted, on this point at least, to have its role displaced and masked by an environmental rhetoric that lets them off the hook as progenitors of the problem.
Harvey himself identifies six limiting factors to the reproduction of capital, namely:
i) insufficient initial money capital; ii) scarcities of, or political difficulaties with, labour supply; iii) inadequate means of production, including so called ‘natural limits’; iv) inappropriate technologies and organisational forms; v) resistance or inefficiencies in the labour process; and iv) lack of demand backed by money to pay in the market.
While the natural limits could be overcome, for some time at least, by new technology, and there are presently no problems of scarcity of labour and resistance from labour can potentially be controlled — though we’ll do our best to prevent that — the real problem looks to be a lack of demand, not supply. The real crisis is one of over-production.
We can’t create new consumers, as this would lead us to ecological and purely physical constraints; where to put those people and how to feed them. The only choice left then is to increase consumption still further. But can we really expect it to double and double again before I retire? And to continue to double every 20-25 years from now until eternity? Is that the future we really want even if we could? Or does the looming pensions crisis force us to re-examine the foundations of our economy and discover a post-capitalist alternative less prone to internal contradiction and crisis?