We can then think of a state pension as being insurance against living too long. The outcome of that logic is that the pension age should be the same as the average lifespan
As William Shakespeare told us, there are ages, seven of them, to the life of man.
The idea is rather older than that, forming the basis of the Sphinx’s riddle as well. My point being that we all do, barring unfortunate accidents and circumstances, end up in old age. Given that we all do, there’s no economic problem here, for something that happens to all is quite easy to deal with.
However, increasing lifespans do mean that we’ve got to recognise that those different ages, old age itself, turn up at rather different ages these days. That does pose an economic problem and also a political one. For what is the correct age at which we now say that people are old? When they are due some privileges from the rest of us?
AMA Muhith has just suggested that in Bangladesh, this definition of “senior citizen” should change, from a general idea of 60 years of age to one of 65. This isn’t a hugely important change, as there’s not much that goes with being so called.
But it’s an illustration of something much more important — pensions ages and any other fiscal or state privileges we might grant to the old, and at what age we consider them old enough to gain such privileges.
It’s easiest to consider this from the point of view of the old age pension. The existence of this in Bangladesh is rather new, only a couple of decades, and the sums are most modest at present.
But we can think back to when Bismark first introduced it in Germany. Then the pension age was set at above average age of death of a man. The thought was not that those who have worked for decades have a right to some years of not working, not at all.
Rather, that those who simply could not do heavy physical labour any more (and most work back then was that) needed to have something to support them when they could no longer do that work.
Hmm, OK, so a modest sum paid from taxes amount as a pension for them then.
What has happened since then is that the pension age has dropped a little while life spans have soared. On average, people are living 20 years long than they did back then. Meaning that what was a payment for some modest amount of years so that the frail did not starve has now become a vast fiscal burden with tens of millions of people being paid for decades.
There is thus a very good argument that the age at which a pension is paid should rise. There’s also a good economic argument here. None of us do know how long we will live. But we can look at averages, think about how long is likely, and then save to meet that expected lifespan.
But as is the way of averages, half of us will outlive that expected lifespan. But we’ll only have saved the rational amount for us to save — half of us will exhaust our savings before we do our lives.
We can then think of a state pension as being insurance against living too long. The outcome of that logic is that the pension age should be the same as the average lifespan. So, for example, in my native UK, the average is some 80 years or so. Thus 80 should be the pension age.
This isn’t quite what Muhith is saying, but it’s using the very same logic. As many more Bangladeshis live past 60, and 70 even, then what qualifies as being a “senior citizen” should change as well.
There’s also a very good argument as to why this shouldn’t happen. Because there is a very great inequality in lifespans as well. An inequality which is greater in a poorer country like Bangladesh as well.
Those who have spent their decades working away in the fields tend not to live as long as those with an easier life in some nice office somewhere. This lifespan inequality can be so great, that a rise in the pension age as above could lead to near no poor people ever gaining one while near all middle class people do.
This would not be what we would call a fair outcome. Especially since the reason for the earlier deaths of the poorer people is going to be closely connected with the harshness of their working life, and thus also their need for another income, as they become frailer with age.
The real point of my laying out this discussion about pension ages is not, though, to really be talking about pension ages. Rather, it’s to point out one of the great limitations of economics.
It’s a very useful subject, certainly, it does indeed reveal great truths about the human condition. But what it does not do is tell us all about said human condition.
Note the above again — it’s entirely rational for the state pension age to rise to the average age of death. No, really, it is, it’s a piece of social insurance against growing too old for the amount of money you have rationally saved. Just as unemployment insurance is insurance against being unemployed — in the rich countries we all pay into the system but only those actually unemployed get money out of it.
We don’t pay those still employed just because they have paid in, just as we don’t pay the fire insurance money back to those whose houses haven’t burned down.
Yet there’s also something deeply inhuman about the idea that only the richer among us will gain such a state pension, the poor dying before they qualify for it if the above change is made.
Or, as we should be putting it, economics is only a guide to what we might do, not the definitive set of rules as to what we must. There are always, but always, other things we must consider as well, things from outside economics.
Tim Worstall is a British-born writer and blogger and Senior Fellow of the Adam Smith Institute