I recently have been thought quite a lot about the phenomena of state-funded pension fund in developed countries. This is not the first time I thought about this. Previously, I noticed similarity between Parable of the Rich Fool in Luke 12: 13-21 with modern concept of saving for retirement. By equating many things inside the parable to modern terminologies (warehouse with CPF’s saving account, harvest with good paying white-collar job), and change the farmer’s word from ‘Eat, drink, be marry’ to ‘Shop, dine and travel’.
It is worse than in the parable in our modern world because this behavior of hoarding money is institutionalized by the state and it encourages selfishness and materialism. These few days, I have read several articles related to family and society and I would like to share the good one for all of us (Although I would disagree with using insurance companies as I think it is potentially almost the same as state pension fund):
Social security systems around the developed world are faced with a looming financing crisis. Unfunded pay-as-you-go (PAYGO) schemes are heading towards bankruptcy due to rising longevities, low fertility, and declining labour force participation rates.
Much of this is not accidental. Compulsory PAYGO schemes tend to discourage work in older ages and penalize larger families. Thus they contribute to their own bankruptcy.
The question is what to do about the situation. In Europe (where things are more serious), some countries are doing nothing, while others are raising minimum retirement ages and contribution rates. This will keep the systems running in the short term, but it fails to strike at the heart of the problem. In the long term, such measures discourage work even more, and they will make diligent workers slaves of a failing system.
A better solution is to get the state out of old-age security. The trouble is that many people cannot imagine old-age security without the state. This is particularly the case in continental Europe, where few people have private pension plans. To their minds, abolishing existing social security schemes implies millions of people starving to death or freezing out in the cold.
In communist countries, many people believed that capitalist economies were lacking even the basic necessities, whereas their benevolent governments were looking after them. But of course there can be food, houses, cars, and even music and literature without the state. There will be all of these in much greater abundance, when people are left free to pursue their own ends and satisfy their needs through individual responsibility, joint effort in local communities, and mutually beneficial exchanges in the marketplace. The same holds true for old-age security.
A combination of income sources
Still, many of those who basically accept free-market principles believe that the government should intervene in some areas, and that old-age security is one of them. Retirement, they think, is a far-off event, and therefore cannot be entrusted to markets. Besides, some people are not clever enough to save for their retirement, so the government must support them.
There is truth to these claims. However, the conclusions do not follow. In fact, precisely because old-age security is a challenging long-term issue, it should not be entrusted to politicians who are more concerned about satisfying the short-term needs of this or that special interest group.
Moreover, old-age security in a free society would not be a thing of the market alone. Most people would rely on a combination of sources: family, markets, mutual aid, charity, and work.
1. Family support
Governments did not invent pay-as-you-go social security. They copied it from the oldest social institution in the world — the family. Before the establishment of the modern welfare state, extended families functioned as a source of informal social insurance. Security in old age was provided on the basis of reciprocal generosity: parents procreated children, supported them and educated them. In return, children supported their elderly parents with money, housing, and care. This continues to be the basic pattern all around the developing world.
Before people were forced to finance the retirement of the rest of the society, they had many more children. Not just for the fun of it, but also because having children was economically sound. This is why people in less developed countries (LDCs) have larger families today. As Julian Simon once put it, those “who believe the poor do not weigh the consequences of having more children are simply arrogant, or ignorant, or both.”(1)
This was well known in 19th-century Europe. When Bismarck established the first social security system in the world, he did so for this very end: to replace the family. Whatever his reasons for such a brave move, he succeeded exceedingly well. Before Bismarck, Germany had one of the highest fertility rates in all of Europe. Today, its total fertility rate is below 1.4. This will reduce the mighty European nation to half of its present size in about 50 years — unless, of course, they decide to replace German kids with Arabs and North Africans.
Now, some people argue that governmental social security is more efficient than the family. For one thing, family support is more prone to localized risks. This much is correct. However, these risks can be alleviated by risk pooling — hence the norm in traditional societies is the extended family.
Besides, there are other reasons why public programs are actually less efficient than the family. They give rise to a range of free-riding and moral-hazard behaviours such as over-early retirement, faked disability, and having too few or no children. The extended family avoids these problems, because its members deal with each other regularly, know each other well, and have better incentives to act for the common good.
2. Financial markets
Not everyone can have a family, or indeed wishes to have one. These individuals can provide for themselves through the market. Modern financial markets provide a range of pension and savings plans. Even those who invested in a large family would probably save through the market as well.
There are some common worries regarding the market for savings and insurance. One is that people do not know how to invest, so they can be exploited by rogue dealers. Another is that markets cannot be trusted as funds may go bankrupt. A third kind of worry is that people are too foolish to save enough for retirement.
A major problem here is that we don’t actually have free financial markets. I am not just referring to the wasteful and anti-competitive over-regulation that is taking place. Saving and investing privately would be far easier and simpler if the government didn’t meddle with the monetary system.
First, governments pump more money into the economy, inflating the currency and making it more difficult for individuals to save. In many LDCs, it would be insane to keep your savings in paper money which loses its value at double-digit rates each year. In Mugabe’s Zimbabwe, the current situation is a real nightmare: annual price inflation has gone past 1000%. In LDCs there are few places to safely invest your wealth. But even in the United States and Europe, with allegedly “controlled inflation,” one needs actively to look for safer havens.
And safe havens are few and far between because of the secondary consequences of central-bank-led credit expansion. The central bank’s manipulation of interest rates gives rise to artificial business cycles, which make markets highly unstable. In this system, private individuals have every reason to be wary of financial markets, banks, and insurance companies. The overall result of government interference in monetary affairs is that people are increasingly dependent on their governments to look after them in times of need.
It’s better nevertheless
Despite the defects of the current system, financial markets work better than many believe. Firstly, competition is the best guarantee of good service and safe products. Yes, there can always be some hit-and-run companies trying to make short-term profits, but most people tend to rely on the more established operators with a longer-term track record — especially if one’s old-age security depends on it.
In the absence of state-provided old-age security, people would also develop investment skills. Presently, the public education system is leaving people so financially illiterate (if not literally illiterate) that one wonders how they can cope in the modern world. In the absence of governmental old-age provision, families and private individuals would have better incentives to learn the tricks of the trade so that they can look after themselves. People could also bundle together and form non-profit investment clubs, which would help them to choose good products and follow the markets.
The second concern, the risk of bankruptcies, is more complicated. First, one should remember that governmental schemes are not safe either, because pension benefits depend on various economic, demographic, and political factors. With a suitable legal framework, markets can provide more security. Second, much of the worry with pension plans has been due to harmful government regulation, which in the past directed funds to imprudent and hard-to-manage defined-benefit plans instead of safer defined-contribution plans.
A third worry is that people tend to save too little. This is the common argument for compulsory savings schemes. Compulsory savings are politically more popular than a genuine free market, but not necessarily a good idea. For one thing, compulsory savings schemes imply that the government is looking after the whole show, which tends to justify harmful over-regulation.
Moreover, there is a problematic assumption here, which is that everyone needs to save for their entire retirement. This is an inherently anti-family assumption. It forgets that children should be an economically valuable investment (although also more than that), just as they were in the past.
Indeed, it is often claimed by academics that, in countries without extensive government social security, people do not have enough retirement income. But the calculations on what is enough are inaccurate because they exclude factors one cannot measure — for example, the support that a mother of large family receives from her children is not captured in any statistics. But that is the most natural and common type of old-age security.
3, 4. Mutal aid and charities
In addition to families and markets, there is a mid-way solution, called mutual aid or fraternal societies. Before the advent of governmental welfare programs, mutual aid societies provided practically every kind of welfare service imaginable, including orphanages, hospitals, job exchanges, homes for the elderly, and scholarship programs. They also supplied health insurance at much lower rates than the present-day formal schemes. The reason they could do so is that members knew each other and supported each other, so there was less opportunity (and less desire) for moral hazard and free riding.
In a free society, mutual aid societies would possess several advantages as providers of old-age security. They are run by people who know each other, and there is a sense of community that avoids the inflexibilities of formal programs. They work better for those who lack financial skills. In the past, mutual aid societies were not elite groups but were usually run by working-class people who knew each other and knew how to solve each others’ problems.
As of today, they could combine their informality with the benefits of sophisticated financial markets so as to pool their risks better. They could also operate private investment clubs.
In addition, there would be charities. These would target the needs of the poorest members of the society, those who have no one else to look after them. In the absence of governmental social security programs, this would probably be just a small group, because the vast majority would be looked after by a combination of family, savings, and fraternal societies. Charity could also help those whose alternative support is inadequate.
The most common concern regarding charity is that is it based too much on emotions; thus it can be variable, and donors may be too slow to react to unobserved needs. But in fact, the opposite is actually true: charities are more dynamic and adaptable than government welfare agencies. Moreover, there are various charities — the International Red Cross is an easy example — that operate on a very long-term basis and have an extensive supporter network.
Charities are also better operated than public welfare programs. They achieve more with fewer resources, and they treat their clients with more humanity and dignity. They are also more concerned about the overall well-being of those in need. Unlike government welfare, private charities and mutual aid societies do not penalize effort and thrift, but encourage initiative and responsibility. Many also help their clients to find work, learn useful skills, and acquire personal virtues. The great advantage of charities is that they are commonly run by people who believe in something greater than the state.
A practical challenge is that even generous people do not always know how to help, and they are reluctant to give money to organizations they do not know well. This can be alleviated by portals and webtools such as the Samaritan Guide, set up by the Acton Institute’s Center for Effective Compassion.
Last but not least, people can work in old age. This is not to say they must do so, but they should be free to continue working without being penalized by the disincentives embedded in the social security system.(2)
In fact, the very concept of “retirement” is an invention of the state. Before social security systems were established, the vast majority of people continued working past 65. Today it would be even easier to work longer, because health care is better and most jobs require no physical exertion.
In the absence of governmental old-age security, most people would probably work longer, either full time or part time. This would be economically more sound than early once-and-for-all retirement. Working longer would be an additional source of security for those who otherwise might be short of means in old age. Part-time work also provides better health on average; full retirement causes physical and mental health deterioration.(3)
According to survey results, many people would prefer to continue working anyway, even if they are financially secure.(4) Their work is an integral part of their life and an important source of companionship and meaning. The trouble is that it can be difficult for older workers to keep their jobs, particularly in European countries, where labour markets are over-regulated and age-based discrimination is prohibited. Therefore a sound policy of old-age security must be accompanied by the liberalization of the labour market.
The economic and moral benefits of freedom
Old-age security is not merely possible without the state. It would be far better that way. It would be more secure than public social security, which is based on empty promises by politicians. Existing governmental schemes are rapidly heading towards insolvency after only 50–70 years of operation. A non-governmental arrangement would be more secure, because people would rely on a combination of income sources, so that the system would be more robust, flexible, and dynamic. It would also cater to different individual circumstances and preferences, and it would provide better incentives to work, save, and have children.
The benefits of a system of old-age security without the state would be more than economic. It would also foster the acquisition of personal virtues and responsibility, which would then be reflected in other spheres of private and social life. A non-governmental system would even treat the least fortunate members of the society with more humanity and dignity, and there would be fewer such people overall.
Old-age security is far too important to be left in the hands of the state.