This is an ambitious and important volume in a series which aims to offer ‘an authoritative and state-of-the-art survey of current thinking in a particular subject area’. In this case, the subject in question is pensions, a field of tremendous political, economic and social importance but also, let us be frank, of sometimes mind-numbing complexity. The editors' starting point is a recognition that the burden of paying baby-boomers' pensions has challenged the long-term sustainability of public-pensions systems in developed economies, necessitating choices between conflicting expenditure demands by different generations. As the costs of supporting older people increase proportionately with population ageing, the problems of the developed world today are likely to be those of the developing world at some point in the future. Thus the provision of adequate retirement income is of enormous concern for countries across the world.
The book has five parts. The first places the issue of retirement in context. Pat Thane, for example, reminds us that the concept of a ‘retirement age’ did not become an unquestioned, normal fact of life in developed countries until the post-1945 ‘golden age’. Camila Arza and Paul Johnson provide a global tour d'horizon of pension systems (with some exceptionally useful comparative tables) and note that, as no single model sufficed in the past because of different social, political and economic national conditions, it is unlikely that any one model will suffice in the future. Other chapters examine the development of occupational pensions, the ways in which women have generally been profoundly ill-served by pensions systems, and the implications for social solidarity of increased individualism, ageing and globalisation. Three chapters then survey the economic implications of ageing, shifting life-cycle preferences and options, and evidence regarding the impact on national savings of pre-funding pensions.
In the second section, six chapters examine different aspects of retirement income provided by the state. Warren McGillivray, for example, reminds us that no matter how they are financed, at the time they are paid pensions are transfers of resources from active workers to inactive pensioners. From the economic point of view, therefore, all public schemes, however financed, are pay-as-you-go. In reforming such schemes, most countries have pursued sustainability by tinkering with the parameters of contributions, retirement ages and pension levels rather than by making fundamental changes. But there has also been a move to a ‘funded’ approach in state schemes by creating individual accounts into which employees and/or employers make compulsory contributions that accrue until retirement. As Adam Creigton and John Piggot note, in such ‘defined contribution’ schemes, the value of an individual's retirement fund (and thus of their retirement income) becomes highly dependent on investment performance, fees and charges, and tax. But, argues Richard Disney, neither are ‘notional’ variations of such schemes, a compromise approach that effectively reforms the standard pay-as-you-go approach to provide a much closer link between contributions and benefits are no ‘magic wand’: they avoid some of the problems associated with pre-funding and increase transparency but, in doing so, reduce the scope for redistribution from high to low income earners.
Occupational pensions have become an increasingly important part of the pensions' scene, with pension-funds assets in OECD countries now amounting on average to 25 per cent of gross domestic product, and 33 per cent of market capitalisations. According to Michael Orszag and Neha Sand, much fundamental research remains to be done on how best to invest those assets, and the growth of such funds also makes issues of pension-fund governance more pressing. The pronounced shift from traditional ‘defined-benefit’ schemes to ‘defined-contributions’ is examined by several contributors. It involves a substantial transfer of pensions risk from employers to employees and, as Teresa Ghilarducci notes, employers' success here is in large part due to the decline of union power in advanced industrial democracies that flows from globalisation. Alicia Munnell points out, however, that the risks taken on by individuals as a consequence of this shift are compounded by their chronic inability to master the complex financial decisions that might mitigate them.
Issues of financial planning are, of course, important in privately-purchased pensions with decisions about retirement saving perhaps the most crucial taken by the average citizen. Conventional economic theory predicts that individuals will act prudently, yet many do not. Steven Venti highlights the urgent need for research into why not, and the lessons of such behavioural research need to be built into the design of pensions systems – for example by taking an ‘opt-out’ rather than ‘opt-in’ approach (as recommended recently by the UK Pensions Commission for its proposed National Pensions Savings Scheme), by reducing the bewildering number of funds that confront contributors, and through default options for contribution levels and asset allocation.
Perhaps the most interesting section in the book is that which looks to the future. Carmelo Mesa-Largo, for example, raises serious questions about further privatisation, arguing that the Latin American experience suggests that few if any of the presumed benefits will materialise. Noel Whiteside questions the neo-liberal assumption about the superiority of markets, arguing that it is fundamentally flawed in pensions, not least because the nature of pensions' risk and complexity has consistently required regulation that raised transaction costs and administrative complexity, reduced transparency and, by demanding public subsidies, obscured market signals. In perhaps the best chapter, Gary Burtless brings us back to the issues of poverty and inequality, and the ways in which pensions can redistribute income from rich to poor, and potentially between generations. Few countries will be able to avoid reforming their public-pensions system, and those reforms will almost inevitably have redistributional consequences. Ultimately, however, Burtless is surprisingly optimistic; he emphasises the political costs of unwinding the enormous improvement in the relative income position of the aged that was secured by developed economies in the second half of the 20th-century.
In sum, therefore, this volume is rich in chapters that outline current thinking on many aspects of pensions and retirement income and that highlight areas for future research. On the other hand, for a relatively small investment of time and money the end result could have been better still. The book would, for example, have benefited from a consolidated bibliography and from better labelling of a number of its graphs. A greater editorial voice would also have been welcome, drawing out more effectively the many themes highlighted by contributors and exploring lessons for the future. Taken individually, however, the book's many chapters provide concise and generally very readable introductions to complex topics that will be of undoubted utility to undergraduates, researchers and practitioners.
