Pensions

Written by Professor Larry Locke (University of Mary Hardin-Baylor and LCC International University)

On three successive Tuesdays last November, Michael Otsuka of the London School of Economics delivered the annual Uehiro Centre Lecture Series.  The Series, entitled “How to Pool Risk Across Generations”, focused on the ethics of pension reform.  Otsuka attacked the real-world problem of low bond yields producing a crisis of pension funding with three alternative models.  Echoing Derek Parfit’s magisterial work, On What Matters, Otsuka presented his proposals as three alternative means for scaling the dangerous summit of pension obligations.

Otsuka’s proposals are important.  Ethics issues rarely come with this much money at stake.  In 2018, the Office of National Statistics published a study showing that UK pension schemes were underfunded by over £5 trillion .  That is an attention-grabbing number but not extraordinary in the context.  The Trustees of the US Social Security system recently published their 2020 report indicating this scheme alone anticipates a shortfall of US$16.8 trillion over the next 75 years.  Like scientists employing standard form when the numbers they use become too large to comprehend, the US Social Security Administration now refers to its shortfall in terms of percentages of total payroll taxes.

The proposals Otsuka has set forth are not amoral financial models.  Each involves shifting risk and responsibility among parties, and sometimes across generations, with diverse arguments as to the fairness of these shifts.  Any resulting pension system’s impact on lifestyles and liberty for workers, employers, and governments may strain the social contract between these groups and set them up for a potential fall.Read More »Climbing the Pension Mountain: A Review of Michael Otsuka’s 2020 Uehiro Centre Lecture Series