University pensions dispute and the life-cycle theory

University lecturers began a strike over their pensions last week. The dispute may even run on and jeopardise the summer exams.

The main issue is that the universities’ pension scheme seems to be in substantial deficit.  To solve the problem, a move from defined benefits to defined contributions is proposed.

With the former, the pension is a guaranteed amount each year.  With the latter, the pension depends upon how well the assets which back it are performing.

Matt’s cartoon in the Telegraph brilliantly captured the reactions of many, as he so often does.  Two dons are walking through a quadrangle, with one saying “if a philosophy lecturer went on strike and all his students slept through it, did the strike ever happen?”.

The more liberal elements of the media have been much more sympathetic. Lengthy interviews with the strikers and their grievances have been published.  These are illuminating.

A woman in her early 30s, for example, complained bitterly that the uncertainty that the changes would bring to her future pension were creating so much stress she was barely capable of doing any work. 

The life cycle theory of savings and consumption, favoured by many economists, would be helpful to her.  Put simply, she should save more whilst young to draw more benefits when she is old.  She, and others like her, could simply take out a personal pension scheme to boost their existing one.  But this rational choice appears to have escaped her.

A lawyer in his early 40s conformed more closely to the paradigm of rational behaviour.  He was very clear.  It was the responsibility of his employer, the university, to provide him with a guaranteed income when he retired.  So someone else could pay for his benefits.

The motives of many students are more difficult to discern.  Many seem to be fervent supporters of high pensions for their teachers.  This could be pure altruism.  Or it could just be stupidity.  Because they are the ones who will be paying for these pensions.  They will be working when the lecturers have retired.

Pensions can only be paid out of the efforts of those currently in work.  Even intelligent people, which for all their faults is a category which embraces many lecturers and students, often fail to grasp this basic fact.

Pensions provided by the state are funded out of taxation.  Parts of many private pensions will be paid for by interest on government bonds, but taxes are needed to pay for this. 

Pension assets invested in the stock market give rise to a stream of dividend payments.  But these in turn depend upon the productivity and efforts of the labour force at the time.

An exception might seem to be a country such as Norway, which has used its oil assets to investment abroad.  This just means they have been smart enough to get foreign workers to pay their pensions rather than their own citizens.

A demand for a guaranteed benefit is nothing more than trying to hold a future generation to ransom.  Only they can pay it.