Comments on: Mervyn King on Uncertainty

By: Tracy

Tracy — Thu, 16 Dec 2004 08:14:29 +0000

Alex – unfortunately under NZ super since superannuation payments are tied to the average wage (to be specific, the married couple’s rate is set at 65% of the average wage), it is nearly impossible under current rules for economic growth to diminish the problem. As incomes go up, retiree’s incomes go up. As the ratio of retirees to workers goes up, this implies that the relative proportion of incomes going to workers goes down. And then you can add in healthcare costs, which are likely to go up substantially too. (Nearly impossible because there could be some massive transformation in the economy which means that the bulk of income increases show up in self-employed and investment income, while wage income relatively declines. This seems unlikely.) I don’t know how many other countries around the world face the same problem.

By: Alex

Alex — Wed, 15 Dec 2004 23:34:34 +0000

Transferring some of the risk to future generations can be justified on the basis that they are likely to have significantly higher real incomes than current generations.

By: Jason McCullough

Jason McCullough — Wed, 15 Dec 2004 22:39:16 +0000

For some reason annuity companies & life-insurance companies trading off opposite-direction risks on life expectancy through financial instruments reminds me of the old Warner Brothers cartoons.

By: Dubious

Dubious — Wed, 15 Dec 2004 18:39:53 +0000

As pointed out in the paper, there are two types of uncertainty over lifespan. First, there is uncertainty over one’s individual longevity. Defined Benefit pensions (such as SocSec) and annuities are extremely useful products for that kind of risk. Extremely naive economic theory (The Lifecycle Theory of Consumption) suggests that retirees should annuitize 100% of their lifetime wealth. There are many theoretical reasons why this would not hold true. There is a fair amount of empirical evidence that retirees in the US, particularly poor retirees, hold TOO MUCH of their income in annuitized form. Many poor households hold essentially 100% of their wealth in SocSec or other defined benefit pensions. They would prefer lower monthly payments in exchange for a stock of liquid wealth. As mentioned by Tracy, given that increases in population-wide life expectancy (or shortfalls in birthrates) rarely seem to have resulted in benefit cuts (with the exception of raising the normal retirement age to 67), it would seem the current system puts all the risk on the working age population. This seems somewhat lopsided.

By: Tracy

Tracy — Wed, 15 Dec 2004 17:05:19 +0000

The cause for concern with current public pension systems is that they shift too much of the risk to future generations, in that future generations are likely to be too small to pay for the pensions promised to the baby boomers. (Obviously some of these future generations already exist and are working). E.g. the NZ superannuation scheme ‘guarantees’ NZ super paid at age 65 at a fixed ratio to the average wage. Consequently, if longevity goes up, under this scheme retirees’ income doesn’t fall, except indirectly if taxes are raised or government spending cut, instead then-workers’ income falls or other government services are cut. Especially since the NZ tax system is roughly progressive, so most retirees will lose less as a proportion of their income if taxes are raised than workers. Most privatisation schemes appear to be designed to shift some of the burden back to current workers, by requiring current workers both to pay for current retirees and set aside money for their own retirement. Ditto Dr Cullen’s super fund. This does raise the question of who is expected to buy all these assets when around the world the baby boomers start retiring. It also means none of the risk is borne by currently retired. In other words, it’s going to be painful one way the other.

By: P O'Neill

P O'Neill — Wed, 15 Dec 2004 14:27:19 +0000

The newspaper accounts when he originally gave the speech focused on his idea of Longevity Bonds, or some other related type of insurance based on the life expectancy of cohorts. The potential demand for this instrument is clear—but less clear is who would be either willing or able to supply them. He’s implying that it’s the government but doesn’t quite say so, and kicks the issue into touch via footnote 25. But it’s certainly relevant in the rush towards privatisation and the downgrading of the generational insurance aspect of pensions to have an answer.