A Possible Pension-Savings Paradigm for a Sustainable Future: A ...

journal of organisational transformation & social change, Vol. 11 No. 3, November, 2014, 207–229

A Possible Pension-Savings Paradigm for a Sustainable Future: A Developed Country Case Study (UK) David Passig Bar-Ilan University, Israel

Moshe Gerstenhaber

For millennia, the percentage of the population aged sixty-five and older never exceeded 3 or 4 per cent (Dorling, 2013), while the percentage of children under the age of 5 numbered between 15 and 20 per cent. By 2050 this picture will be reversed due to various demographic mega-trends. This means that many developed nations need to rethink their assumptions regarding their existing pension-savings and accumulation paradigm and rebuild their very conceptual foundations. Some countries try infusing into the defunct current pension-savings’ model small adjustments; but what is required is an entirely new pensions funding and accumulation paradigm. The new paradigm proposed in this paper is based on ten pillars addressing the demographic and economic challenges projected ahead. Two principles guide the proposed model. One is that it must foster confidence among the citizens who will retire in mid-twenty-first century that they may have sufficient financial resources for long retirement years. The second principle is that the new pension funding system must leave them with enough available funds for social and economic development as they save for the long years of retirement. keywords pension-savings, future, retirement, UK

Introduction There are economic, social, or political challenges which, if a solution is not found in good time, are likely to send entire cultures on a downward spiral. At the beginning of the twenty-first century, we identified one problem that stands out ß W. S. Maney & Son Ltd 2014

DOI 10.1179/1477963314Z.00000000030

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DAVID PASSIG and MOSHE GERSTENHABER

above the many other challenges facing humanity — the pension-savings and accumulation paradigm. It is an issue that lurks in a dark corner of the daily discourse of developed societies. It is being talked about regularly yet the true scope of the enormous risk facing society and the individual is not fully recognised (Dorling, 2013). Despairing at what we discovered, we developed an alternative possible model that can solve the inadequacy of the existing model and, primarily, bring some good tidings to those who will be going into retirement starting in the 2050s — those who expect to be in their thirties in the beginning of the second decade of the twenty-first century. In this paper, we present a digest of the main shortcomings of the current pension’s paradigm and suggest a possible future ten-pillar based pension funding and accumulation model for a sustainable future (Gerstenhaber, 2009). The aim of this paper is to address the challenges facing developed societies. It is beyond the scope of this paper to address the vast differences in the pension savings’ programs worldwide. It is beyond the scope of this paper to address the variances of Asian societies or developed countries that have different demographic and economic conditions. We have demonstrated in detail the suggested saving and accumulation model for the UK since it can be considered in many ways a typical developed Western society. We acknowledge that each developed nation has its own variances. Nonetheless, since the challenge of rethinking the pension savings’ model is daunting at this initial stage, we believe that at this stage a generalised model should be put on the table for discussion and along the road each society will have to find the right adjustments to better reflect the specifics of its demographic and economic conditions. In this paper we review some of the demographic mega-trends that burrow under the foundations of the existing model. We discuss the social and economic challenges that derive from them and then we present the principals on which our alternative paradigm is based upon. Finally, we list the ten pillars that construct the model and demonstrate it by reflecting through the UK’s current demographic and economic data.

Demographic mega-trends Before we list and explain the ten pillars of our proposed new pension’s model, we would like to illustrate the extent of the challenge facing developed societies through a graph that demonstrates the ratio which existed between the age groups in human society over the course of the past millennia. Figure 1 summarises a large body of studies (Longman, 2004; Connelly, 2008) and provides a stark visualisation of how dramatically this ratio will change as we approach midcentury. It demonstrates how a situation that held true for thousands of years is completely inversed within just a few decades. If current demographic mega-trends were to continue at their present pace, by 2020 the world (seen as one unit) will pass the tipping point at which the number of people aged 65 or older equals the number of children under the age of five. By mid-century, the age-group ratio that typified human society for thousands of years will have inverted. For millennia, the percentage of the population aged 65

A POSSIBLE PENSION-SAVINGS PARADIGM FOR A SUSTAINABLE FUTURE

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figure 1 The ratio between age groups in the human population towards 2050

and older never exceeded 3 or 4 per cent, while the percentage of children under the age of 5 numbered between 15 and 20 per cent. The economic, social, and political implications of this inversion will rock the foundations of human society’s institutions, services, and products (Badiou, 2012). This trend is amplified when we take into account the annual population growth levels that will characterise the twenty-first century. Many of today’s scholars residing in developed societies (Baird 2011) are of the opinion that the ‘population explosion’ will continue unabated, and that we need to adapt today’s financial systems and social networks to it, with all that it entails. If decision-makers continue to rely on that widespread conception, it is difficult to describe the extent of the crisis that is in store for future markets, followed by institutions like the pension institutions (Hughes, 2010). Trends’ analysis show that by 2050 the global population will reach a peak of 9 to 10 billion people before it begins to decline (Dorling, 2013). Long before it reaches its expected peak, the world’s population will age dramatically, spinning many of the social and economic institutions as we have known them in the twentieth century, into chaos (Dorling, 2011). Figure 2 illustrates the decreasing natural population growth rates, following which the human species is expected once again to number between five and six billion people; towards the end of the century. Of this population, a massive 20 to 25 per cent will be aged 65 or over. All these people will be hoping to be retired, receiving living wage pensions, and expensive old age and infirmity care. It is starting to become clear that the founding assumptions of our existing pension system have changed completely (Pearce, 2011). Governments are desperately trying to modify the rights (and therefore financial obligations) that this system promises, whether by raising the retirement age or by cutting the benefits of future pensioners. Even when governments do make such changes, in the face of the powerful opposition of workers’ organisations and amidst the angry

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figure 2 Drop in average natural population growth towards the middle of the twenty-first century

cries of the insured, they can hardly succeed in changing the grim picture that these trends project.

List of challenges The financial quagmire which the pension-savings institutions are expected to encounter at the beginning of the twenty-first century is daunting. The following list of challenges facing the state and the population is just the tip of the iceberg, as one can grasp at this point of time.

Generous services The greater population, at least in the industrialised and developed world, has become accustomed to a much higher standard of living than that available on average just two generations ago (Akerlof & Shiller, 2009). The citizen has grown accustomed to thinking that, when bad times come, we will have access to any number of social safety nets. These facilities will help the individual survive in times of crisis: from birth allowances, through unemployment benefits, and up to a package of fairly generous welfare benefits. The average person in the industrialised world has become accustomed to the fact that a good health care system awaits him or her whenever s/he should need it. The average person at the beginning of the twenty-first century has simply gotten used to the fact that the state has assumed a major economic and social role (Easterbrook, 2004). But one of the reasons that these good things are on the brink of disappearing in many democratic countries is precisely because neither government nor other public institutions can afford their mounting cost. In fact, these services have been funded from borrowing for quite a while. Continuing annual budget deficits have led to soaring and unsustainable national debt levels (Barnow & Hobbie, 2013).


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Life-span One of the main factors that will distinguish the twenty-first century so categorically from any prior period in human history is, of course, the dizzying rise in the average human life-span. If we do not look at this issue within a truly broad perspective, we will be incapable of understanding the full scope of the financial and social pressures that will be brought to bear on the present structures of society but especially upon the institutions responsible for pension-savings and accumulation — pressures that will eventually force us to begin to devise alternative, and much more effective pension structures. Of course, the sooner this is done, the fewer people will suffer from poverty and humiliation in old age (Davies et al, 2008). And spare society disgrace. Homo Sapiens’ lifespan has made a remarkable leap in the last 30 000 years (Mitchen, 2004). To the best of our knowledge, the average life span of CroMagnon, the humanoid that preceded Homo Sapiens by a little and lived 35 000 years ago, was a mere 18 years. After no less than 35 000 years, in 1800 C.E., humankind had managed to add only 7 years to its average life span, with the global average reaching 25 years. But in the last 200 years, this number has tripled itself (Figure 3). As to the UK life span (Dorling, 2012), about 10 million people are over 65 years old at the beginning of the second decade of the twenty-first century. The latest projections are for 5.5 million more elderly people in 20 years’ time and the number will have nearly doubled to around 19 million by 2050. Within this total, the number of very old people grows even faster. There are currently 3 million people aged more than 80 years and this is projected to almost triple by 2030 and reach 8 million by 2050. While one-in-six of the UK population is currently aged 65 and over, by 2050 one-in-four will be. In 2008 there were 3.2 people of working age for every person of pensionable age. This ratio is projected to fall to 2.8 by 2033. Much of today’s public spending on benefits is focussed on elderly people. Sixty-five per cent of Department for Work and Pensions benefit expenditure goes to those over working age, equivalent to £100 billion in 2010/ 11 or one-seventh of public expenditure. The aging population of the UK mirrors that in many other European countries. It too stems from increased longevity — a man born in the UK in 1981 had a cohort life expectancy at birth of 84 years. For a boy born today, the figure is 89 years, and by 2030 it is projected to be 91. The trend for women is similar. A girl born in 1981 was expected to live for 89 years and one born today might expect to live to 92. Cohort projections suggest a girl born in 2030 might live to 95. Healthy life expectancy has not, however, increased as fast, resulting in proportionally greater demands on public services such as the NHS. Today, the World Health Organization (WHO) does not measure human life span according to the chronological number of years until death, but by the number of healthy years the person lives. According to this method, in the developed countries at the beginning of the twenty-first century, the world average of healthy years stands at 71. After these years the human being succumbs to chronic illnesses that generally characterise old age. These can last for several

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figure 3 Life-span of Homo Sapiens over the years


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years — approximately 5 to 10 years of the chronological life-span of the individual, on average. The WHO’s data (www.who.int) indicates that the country with the highest and healthiest life-span at the beginning of the twenty-first century, is Japan, standing at 78 years. The country with the lowest life-span is Sierra-Leone standing at 28 healthy years. Figure 3 could be seen to illustrate how human life-span is only beginning to accelerate. If this is true, there is no reason to assume that the growth-rate of human life-span will continue in a linear pattern. On the contrary, according to some studies (Kurzweil, 2006), it is likely to rise exponentially. Thus, if human beings tripled their life-span in the 200 years since 1800 because they found better ways of maintaining a hygienic lifestyle and improved sanitation, or because they found ways of enriching their diet and improving medicine to treat their diseases, then, with the help of genetic engineering, improved lifestyle, and diet that slows the aging process, they could easily double their life-span in the coming two centuries. Therefore, projections that the average person could live 130 and even 150 years might not be so outrageous. There are many who question these ambitious estimates, in particular biologists and physicians who adhere to the paradigm that the human body simply cannot endure for so many years. But developments in many fields of research have challenged this paradigm time and time again. An example of this is a study dealing with a natural substance that was discovered on Easter Island in the Pacific Ocean in the 1960s, called Rapamycin. This substance has already been approved in the USA by the Food and Drug Administration (FDA) for various uses, and the National Institute of Aging Interventions Testing Program supports studies that seem to prove over and over again its life-extending properties in mice - by 9 to 13 per cent (Harrison et. al., 2009). What is even more interesting is that when this substance is administered to adult mice, at an age analogous to 60 years in the average human, this late start in the consumption of the substance boosts its effectiveness threefold and adds to the life-span of the mice 28 to 38 per cent more than control groups. In other words, this substance could add many more years of life to a person with an expected life-span of 80 years, even if s/he begins to take it at age 60. Three laboratories have conducted these studies, obtaining identical results (University of Texas Health Science Center: www.uthscsa.edu). Rapamycin was used as early as the 1970s as an antifungal agent, and it was later approved as an immunosuppressant drug for the prevention of organ transplant rejection (Health Sciences Center at Emory University: http://whsc. emory.edu). Later, it was used as a coating for coronary stents inserted into patients suffering from arterial blockage. Recently, it was administered to cancer patients in some clinical experiments, and it was proven to induce more shrinkage in tumors than anticipated (Medical Research Center at Chicago University: www.uchospitals.edu). Indeed, the results of the studies examining the life-extending properties of Rapamycin have been beyond any researcher’s expectations. Older people are now the fastest-growing segment of the population in all regions of the world (Samir, et al, 2010). While Europe is the world’s oldest region,

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Asia and Latin America have the fastest-growing proportions of older people. In several European countries a quarter of the population will be aged 65 years or over by 2020. By 2050 United Nations projections (United Nations, Department of Economic and Social Affairs, Population Division - UNPD, 2013) suggest there will be a number of countries, including the UK, France, Germany, Italy, Japan, and Spain, in which at least 10 per cent of the population is aged 80 or more and some, such as Japan, South Korea, Spain, and Italy, in which a third or more of the population will be aged 65 or over. Not surprisingly, population aging has been identified by demographers and policymakers alike as the key population issue of the twenty-first century (UNPD, 2004).

Pension years Today, in many countries, including the developing countries, pension payments are expected for about 15 to 20 years on average. In many countries the average man lives for about 15 years in retirement, and the average woman, about 20. But over the last decade, this average has grown by 3 years, meaning that, within 40 years, towards the middle of the twenty-first century, barring any significant change, it is reasonable to assume that the average person in developed countries will spend between 25 and 30 years in retirement. In other words, those in their thirties in 2013 could spend a third of their lives in retirement. Considering the fact that, broadly speaking, the first third of their lives is effectively spent preparing for a career and the second third is spent raising a family and trying to save for retirement, how will it be possible to support them for the last third of their lives? Where will we find the resources to produce the vast capital amounts needed to support so many pensioners for so many years? (Barr & Diamond, 2009) Let us recall that the present pension institution by no means operates according to these assumptions. When German politicians (von Bismarck) formulated the modern pension concept at the end of the nineteenth century, only three to four per cent of the population reached the age of retirement, and those who did reach that age lived for approximately another three years, on average. In order to illustrate these percentages in absolute numbers in the coming years, let us take modern Germany as an example. In 2030, the number of German citizens above the age of 65 will rise from 16 million to 24 million (an increase of 50 per cent) at which point they will make up some 30 per cent of the entire German population. Furthermore, between the years 2005 and 2050, the number of Germans above the age of 80 will increase from 4 million to 10 million — a rise of about 250 per cent; this will mean that Germans in that age-bracket will make up about 15 per cent of the entire German population. The situation in many developed and industrialised countries is not very different from the German case. How will it be possible to support so many people with the help of so few working hands, especially when the entire period of job-market participation will not be more than forty–fifty years: years in which working individuals are meant to save for themselves and for others? (Norbert, 2012) This paper supports the claim that a major demographic and economic change is taking place and that today’s political and business leaders have no idea how to


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tackle this challenge. They may try to reduce the pension rights and benefits of those about to receive their monthly checks in the coming years. They will also try to find additional resources through loans, bonds, or odd taxes on the public, but the further along they go on this path of procrastination, the worse the economic and social situation might become. The result will be that towards the middle of the century (at the very latest) many pension funds will not be able to meet their obligations to the insured, and the funding channels will close before them. For example, in the US, according to Munnell (2013), the present discounted value of the difference between projected revenues and expenditures of the Social Security fund over the next 75 years amounts to $9.6 trillion. Although this number appears very large, the US economy will also be growing. So dividing this number – plus a one-year reserve cushion – by taxable payroll over the next 75 years brings about 2.72 per cent deficit. Munnell estimates the financing shortfall from now to infinity to amount to $23.1 trillion. Most analysts think that this number places too much weight on what may happen in the very distant and uncertain future. Nevertheless, dividing even this infinite shortfall by the present discounted value of taxable payroll over the infinite horizon produces a shortfall equal to 4 per cent of taxable payroll. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. According to Munnell, there is no silver bullet. Despite the political challenge, stabilising the system’s finances should be a high priority to restore confidence in the ability to manage the fiscal policy and to assure working Americans that they will receive the income they need in retirement.

Private pension funds And we have yet to talk about non-governmental employees who are insured by private pension funds. Their relative number in many developed countries is more than 20 per cent. In the United Kingdom they number about 40 per cent of all the insured, while in Israel their numbers are estimated at 50 per cent. Pension accumulation in the private market is generally funded by agreed-upon monthly allocations by the worker and the employer. Often, however, after many years in which private sector employees have set aside their part, they discover that the employer has not deposited his part into the fund. Furthermore, in order for the private fund to be able to fulfill its obligations to the insured which means being able to cover the cost of 20 years of retirement, the individual must contribute regularly for some 40 years, and most importantly, the fund managers must invest the insured’s money wisely in order to obtain good returns. Without growth, the fund will not be able to fulfill its promises, even if the employee’s and the employer’s contributions are transferred regularly for 40 years. This kind of phenomenon all too often creates what is known as ‘actuarial deficits’ as demonstrated above with the US Social Security fund, meaning that the income for the entire active period of the fund does not equal its anticipated expenses. Therefore, when the time comes, it is not unreasonable to assume that these funds will be unable to meet their obligations to the pensioners in full. Furthermore, the economy is moving like a roller coaster, in unpredictable cycles with sharp rises and falls. In down periods, funds lose huge amounts, and often

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people wake up to find that although their fund managers have proven for years to be investing their clients’ money carefully, timing mistakes could sometimes cost the insured the value of many years of savings. In truth, even with the best of will of many fund managers, it will be impossible to meet the expectations that private funds are trying with all their might to provide. The objective circumstances and the conditions of the modern economy do not leave them a large enough margin with which to achieve their mission. We must add to this a further chronic phenomenon of many developed countries — that of significant overt and covert unemployment, which precludes many from saving anything for their retirement. And if to all this we add the ever increasing overall personal taxation levels, (in most of the developed countries), social services that cannot meet expectations and the needs of people even before retirement age — (when the consumption of these services necessarily rises) — what we have is a pressure cooker that is waiting to burst. Finally, let us summarise the list of challenges in a small number of points that should leave no doubt in the reader’s mind that our existing pension model has long since been defunct, not to mention that it will not work at all in the future. The future is already here, and we have no choice but to begin to search for an alternative pension paradigm in order to alleviate the crisis that is gaining velocity. We need a new pension-savings and accumulation model in order to bring relief to coming generations; those individuals who have not yet begun saving at all, or who have not yet even entered the job market. The following five points are:

N N N N N

The current pension-funding and accumulation paradigm will not be able to withstand the burden of providing all of the insured with what they have been promised (and are expecting to receive) for their long retirement years. The resources that the employee and the employer set aside for retirement do not suffice for the long years that the average person will live in retirement — maybe 30 to 40 years for those who will go into retirement at the middle of the twenty-first century. Loyal tax-payers and diligent pension savers will not be able to carry the burden of the large percentage of uninsured citizens that still exists even in the various developed countries. The state will not be able to fill this funding void when the time comes, because even at this point in time it cannot meet expectations. The state lacks the resources required to support those who are obliged to live off the low yields of the funds. The ratio of workers to retirees is changing. In the past, for every 10 workers contributing to their pension savings funds, there were 3 retired people. Today, for every 3 active workers there is 1 retired worker. In some countries, as in Hungary and Italy, the ratio has already dropped to 1: 1.7, and in Finland, France, Japan and others that situation is not far away either (a ratio of 1: 2 and falling) (Keeley, 2007).


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An alternative pension-savings model The difficult question is whether it is possible in the present situation to propose an alternative model for pension saving and accumulation that will be able to meet these challenges in the long term, even if it does not sufficiently solve the shortterm problems? Two additional principles must guide any alternative model seeking to replace the existing pension model. The first is that it must increase confidence among the citizens (who expect to retire in the middle of the twenty-first century) that they will have sufficient financial resources in order to live respectably in the long years of retirement that await them. The second, no less important, principle, is that it must leave these same citizens with enough available funds for social and economic development and self-fulfillment as they save for the long years of retirement (Rodrick, 2012). This is the rationale that must be at the base of any alternative model, lest it invite too great an opposition to succeed. This is one more challenge to be overcome. The new pension-savings and accumulation model proposed here strives and seeks to optimally satisfy both of these principles. Some of its details may need modification, but in our opinion, the proposed new paradigm contains many elements that have a very good likelihood of succeeding in most of the developed countries where the current model fails. The model is based on ten pillars, which together can provide a sustainable new home for a new type of a pension institution for the next century. As we present the proposed new model, we should keep in mind that for those who are about to be born and who will retire in the 2080s, the situation will be grim indeed by the end of the century if a different model for retirement funding is not found and implemented as soon as possible but latest by 2020. To the best of our understanding, if a new model is not developed soon, even if it should take many years to lay its foundations, many developed societies might find themselves in a very daunting crisis. The following is our suggested model.

The Ten Pillars Program: A new pension-savings and accumulation paradigm for a sustainable future 1. Government grant at birth A personal pension-savings and accumulation account will be opened for every newborn in the first month of his or her life. The finance ministry (treasury) or whatever body is charged with this responsibility by the government in any given country will deposit in this account a fixed and agreed-upon sum. This capital contribution could be funded by a special tax (hypothecated for the purpose) to be imposed on the taxpayer and employers with the agreement of a majority of the factions in the legislature. The money that accumulates in this personal account over the person’s lifetime will be invested in productive economic activity by new dedicated institutions that will be established for this purpose (see Pillar 9, below, for an expansion of this). According to numerous calculations, this capital amount could range from £5,000 and £12,500 in 2014 values (UK), in order to suffice for a

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basic pension for the average person living in a developed country. Over the course of 70 years of dedicated investment and accumulation, this modest initial sum will be able to grow to a respectable capital amount that could provide a solid foundation for twenty retirement years. The underlying idea is that a principal sum deposited at the beginning of a person’s life will yield the greatest returns over the life time of the individual and underpin a new process of pension-funding and accumulation to allow the pensioner to live respectably in his long retirement years. Half of the amount needed to open pension accounts for every single child born every year could be funded by the nation’s households, (with the 20 per cent poorest households exempted), and half of the tax could be funded by employers, on a differential basis, according to the number of employees. The total amount that will be collected by the nation every year from this tax will not exceed one per cent of the country’s GDP (more likely around 0.5 per cent of GDP per annum). The initial government grant for every newborn will also be calculated differentially according to gender and socio-economic level. Baby girls will receive a grant that is 50 per cent higher than the £5,000 grant for boys, meaning £7,500. There are two good reasons for this. The first is that women will spend on average 7 years or approximately 33 per cent longer than men in retirement — according to a calculation of an average of 5 years longer life-span for women, in addition to a retirement age starting 2 years earlier. The other reason is so that when the women take time off to give birth, they will be able to extend the period of their maternity leave beyond the legal allowance without their employers having to transfer their contribution into their personal pension account. The children of the poorest in society, whose relative number will not exceed 20 per cent of all the children born in any given year, will receive a much greater grant e.g. for poor boys a grant which is 100 per cent higher than the rest of the male children born in the same year, meaning £10,000. Studies in developed countries have shown that the children of poor people have a 6 times higher risk of being poor at age 30 (Capgemini 16th Annual World Wealth Report, 2012). Therefore, it is much more cost-effective for society to set aside a higher sum for the children of the poor from the outset. Accordingly, girls of poor families will receive a grant of £12,500 at the time of their birth. Since all these capital sums are meant to be efficiently and effectively invested in the productive economy (see Pillar 9), they could also bring about, in time, a meaningful drop in overall unemployment and encourage the children of the poor to find a productive place for themselves in the job market.

2. Parental contributions The parents of every child will be able to add money to their personal pensionsavings account over the course of the child’s lifetime and thus raise the income that the compounding initial sum will be able to provide to the individual’s eventual monthly pension allowance.


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3. Family and friends’ contributions Family members and friends of any individual could also add to the pensionsavings account as they see fit. This can be an additional option for gifts at lifecycle events — from birthdays, through confirmations, graduations, and up to weddings.

4. Employees’ contributions When the individual enters the job market, s/he will be required to contribute into a personal pension-savings plan a minimum of five per cent of the relevant salary each and every month throughout the years of employment.

5. Employers’ contributions Every employer will be required to contribute a minimum of five per cent per month of the employee’s respective salary into his or her personal pension-savings account. This percentage is smaller than what is practiced in many developed countries today. Later on in the individual’s working years, the percentage of employer’s contributions could go up or down (but with a minimum of three per cent once the salary received reaches a certain level of income). Pension’s contributions shall be a negotiable item between the employer and employee as part of the salary agreements in various sectors and industries. However, an agreed minimum monthly contribution must be enshrined in law.

6. First-job additional grants Every holder of a ‘first job’ will be eligible for a supplemental government grant to her personal pension-savings account in the event that the combined employer and employee contributions (as above) do not reach a defined minimum sum. This amount will be calculated by actuaries each year, taking into account the annual rate of growth of the average life-span. The difference (shortfall) will be paid by the state and will be funded from the same tax (Special Levy) that will be used to fund the initial grant at the time of birth. This supplemental funding will be given for a period of up to (maximum) 7 years from the start of employment and no later than age 30: So that these contributions may also enjoy a significant growth in value of the investment by the time the individual reaches retirement age (70).

7. Tax-exemption deposits The tax system may encourage the citizens to contribute to their personal pensionsavings accounts additional sums (windfall) that become smaller as the person approaches retirement, by offering tax exemptions on these deposits.

8. Inheritance contributions The state may allow families to transfer financial assets into individuals’ personal pension plans and thereby to increase their value. Such contributions will be limited so as not to damage the pension prospects of the family members themselves or to serve as a tax shelter. If a person dies before the resources, which have accumulated during their life time have been exhausted, the remaining money may be transferred tax-free to the personal pension-savings accounts of their heirs.

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The heirs will not be able to use these funds for any purpose other than for drawing a pension when they, too, reach retirement age.

9. Super Trusts investments All of the retirement savings accumulating in the Government Grant at Birth pension accounts will be managed and invested by new non-governmental investment organisations called Super Trusts that neither will be under government jurisdiction nor will they constitute part of the existing Pension Funds management system. The current pension funds are generally invested in government bonds, corporate bonds and in stock markets. This system ensures neither proper returns nor the necessary growth of the principal. In the new Ten Pillars paradigm, all of the pension funds will be invested directly into the economy through the purchase, establishment, and management of productive companies. The money will be committed to long-term investments with the goal of attaining at least five per cent compounded annual net growth. The retirement age will be updated when necessary by actuaries in each country, but every individual will be entitled to begin receiving the monthly allowance from age 70 onwards, even if they choose to continue to work. From age 70 onwards the individual will be entitled to receive from his personal account an amount that will be calculated individually and will take into account the amount that has accumulated thus far, divided by the number of months that the average person lives in retirement. The number of months will be adjusted every five years as life-span estimates are updated. Taking into consideration the rate of increase in life-span, the individual may have to lower his monthly stipend so that enough money will remain for her/him for those years. S/he will also be entitled to raise it when new contributions are made to the account, whether from inheritance or from any other source. In any case, the personal pension-savings account will remain active and will continue to accept contributions during the retirement years and as long as the individual lives.

10. MAXILIFE: A Virtual Personal Advisor for each individual The Ten Pillars Program recognises the ever increasing complexity of daily living — especially the process of earning a ‘living wage’. The rapid expansion and constant change in technology coupled with fierce global competition, which is bound to gather pace in the years to come, make it very difficult for the average individual to stay the career course which they may have wished to set for themselves. Therefore, the Ten Pillars Program is proposing the creation of a new software package which will have the capacity to learn to understand the individual and accumulate a database of their specific needs and preferences. The software will be designed to serve the needs of the specific individual and nothing else. The program will never disclose data to third parties other than with the clear agreement of the individual. MaxiLife will be able to help the individual navigate more successfully his/her future economic challenges. MaxiLife will also contain all the necessary information for the individual to be able to follow the performance of their various pension plan investments including the Government Grant at Birth.


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Case study: The United Kingdom as an example In order to demonstrate how the Ten Pillars pension paradigm might look like in a very concrete manner, we chose the United Kingdom as a case study. The UK is an industrialised and western country that could well represent many other developed countries. It is sophisticated enough in order to easily calculate the model’s sections and sub-sections. We have simplified the data in order not to overwhelm the reader with numbers, but it seems to us that the results give an overall picture that illustrates both the magnitude of the challenge and the urgent need for a solution. We have chosen the UK as a case study to demonstrate that the Ten Pillars Program could produce the proposed transformation for an annual cost of 0.5 per cent of GDP. We believe that the cost will be very similar for most countries. (For example; the cost in Israel is only marginally above 0.5 per cent of GDP p.a. despite the fact that Israel has a higher birth rate than Britain).

The estimated costs of the Ten Pillars model in the UK Basic annual statistics Number of live births in UK for 2011 808,000 Girls 394,000 Boys 414,000 Children of the poor (20 per cent of total) 162,000 Gross Domestic Product (GDP) in £ 1440 billion Total workforce population 29.12 million people Number of households 26.135 million Total population 63.182 million Data Source: United Kingdom Office for National Statistics

Government Grant at Birth (Pillar 1) Boys Girls Poor boys Poor girls

£ 5,000 £ 7,500 £10,000 £12,500

Estimated overall annual costs Boys £5,0006414,0005£2.07 billion p.a. Girls £7,5006394,0005£2.955 billion p.a. Poor boy supplement £5,0006(20 per cent6414,000)5£0.414 billion p.a. Poor girls supplement £5,0006(20 per cent6394,000)5£0.394 billion p.a. Total £5.833 billion cost p.a. Total of annual birth grants as percentage of GDP (£5.833 billion6100): £1440 billion50.405 per cent of GDP p.a.

First-Job Government Grant (Pillar 6) Assumption: this subsidy will not amount to more than 10 per cent of the total annual cost of the Government Birth Grant.

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£5.833 billion610 per cent5£0.583 billion p.a.

Estimated total annual cost with the addition of First-Job Grant At the time of birth At the time of beginning a first job Annual grand total

£5.833 billion p.a. £0.583 billion p.a. £6.416 billion p.a.

Total annual contributions as a percentage of GDP (£6.416 billion6100): £1440 billion50.446 per cent of GDP p.a.

A parenthetical comment We estimate that the Special Levy (Pillar 1, i.e., the new hypothecated tax that may be imposed in order to fund the idea at the heart of the Ten Pillars i.e. Government Grant at Birth) will need to be in existence only over the course of 56 years from the start of the implementation of the proposed pension-savings and accumulation model. After that, the Super Trusts (Pillar 9) will be able to autonomously fund the pension tax for the coming generations. The idea is that at the end of the 56th year, all of the Super Trusts’ investment institutions (already in existence at that time) will transfer 10 per cent of all of their accumulating assets to a new investment institution, i.e. another Super Trust, whose sole purpose from thereon will be to invest and generate the necessary income in order to fund 100 per cent of the annual Special Levy.

Projected value of the personal pension-savings account after 70 years Assuming that the Super Trusts succeed in generating on average 5 per cent net compounded capital growth per year (net of inflation), the principal is expected to grow 30.4 times by the time the individual reaches the age of 70. On this assumption, the capital deposited for each person at the time of birth will double itself every 14.4 years. In other words, by age 70 it will have doubled itself almost 5 times (4.86 times, to be precise). Here is how the personal pension-savings account is expected to look after seventy years: Boys £5,000R£152,000 Girls £7,500R£228,000 Boys from poor families £10,000R£304,000 Girls from poor families £12,500R£380,000 These calculations assume that the yields from the investments will be credited to the personal pension-savings account at the end of each year. But, if yields are calculated at the end of every quarter, the overall yield will increase by even more over the years. For example, after 70 years of savings, the accumulated amount for a boy who received £5,000 at birth will reach £162,023.84 instead of £152,132.13. This is an increase of £9,891.71, or 6.5 per cent. In such a case,


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the £5,000 that the individual received at the time of his birth will grow by 32.4 times and not 30.4.

Value of differential monthly allowances (calculated for 20 years of retirement) after 70 years of growth from the initial Government Grant Assuming that the personal pension-savings and accumulation account continues to accumulate profits of 5 per cent per annum on average over the course of the 20 years (between age 70 and age 90), the birth grant will continue to grow up to 44.4 times in total. According to this data, the minimum monthly amount that every pensioner will be able to expect from age 70 through age 90 will be as follows: Boy

£5,000644.45£222,000: 20 years5£11,100 per year, or a allowance of £925 Girl £7,500644.45£333,000: 20 years5£16,650 per year, or a allowance of £1,388 Poor boy £10,000644.45£444,000: 20 years5£22,200 per year, or a allowance of £1,850 Poor girl £12,500644.45£555,000: 20 years5£27,750 per year, or a allowance of £2,313

monthly monthly monthly monthly

These are the minimum amounts that a person will receive (based on 5 per cent p.a. net compounded growth) even if for any reason he or she hasn’t worked a day in their life. If one adds to this amount additional contributions that the person has made into his personal pension account over the course of his life, from family gifts and up to employer contributions, the likelihood will increase for every person to receive a decent living wage for the long years of retirement. In this case, we will once again be able to look forward to our retirement because we will be assured many years to enjoy the fruits from the compounded savings. This should mean that the fears of a life of shameful poverty will be eradicated.

Value of average monthly pension per UK individual after 90 years of growth from the initial government grant (divided by 20 years) 1. £6.416 billion per year: 808,000 children5£7,940644.45£353,000 2. £353,000: 20 years of pension5£17,627 per year 3. £17,627 per year: 12 months5£1,470 per month

Funding the Special Levy (the new tax) Assumptions Number of households in 2011 Workforce in the UK job market in 2011

26.135 million 29.12 million

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Number of households taxed by the special tax

26.135 million less 5.23 million poor families520.91 million (This excludes the 20 per cent poorest households)

First option In the first option, the tax burden is divided evenly among households and employers. Thus, 50 per cent of the annual tax will be paid by households and 50 per cent by employers for each of their employees. With the overall annual cost of the Special Levy in the UK coming to £6.416 billion, 50 per cent of the annual tax, i.e., £3.208 billion will be imposed on all households — excluding the poorest 20 per cent (5.23 million). Accordingly, £3.208 billion divided by 20.91 million households5£153 per year per household, or £0.42 per day (for 365 days/year). In addition, £3.208 billion divided by 29,120,000 people in the workforce5£110 per year for every worker, or £0.50 per day (assuming 220 workdays/year).

The second (preferred) option In this option, the tax burden is divided between households and employers at a ratio of one to two. Thus, households will pay 33.33 per cent of the cost of the initial Government Grant at Birth, coming to £2.139 billion p.a. and employers will pay 66.67 per cent of the cost, amounting to £4.277 billion p.a. Accordingly, £2.139 billion divided by 20.91 million households5£102 per year or £0.28 per day (at 365 days/year). Furthermore, £4.277 billion divided by 29,120,000 people in the workforce5£147 per year per worker, or £0.67 per day (at 220 work days/year).

Proof of concept It could be said that Pound-per-Pound the provision of the Government Grant At Birth funds (about 0.5 per cent of GDP p.a.) is possibly going to produce altogether some 100 times more value than the money contributed at present by employees and employers towards pensions, as well as, the cost of the tax concessions which government offers to moneys contributed towards pension accumulation (most of which benefit the more affluent in society). Based on the Government Grant at Birth moneys growing at 5 per cent p.a. net compounded for 90 years we have calculated the expected annual income at age 70 through 90. It should be noted that the current UK median family income is said to be about £26,000 p.a. Here is our proof of concept: 1. 2. 3. 4. 5.

Two men sharing the cost of living: £11,100 p.a.625£22,200 p.a. Man and woman sharing the cost of living: £11,100 p.a.z£16,650 p.a.5£27,750 p.a. Two women sharing the cost of living: £16,650 p.a.625£33,300 p.a. Man and ‘poor boy’ sharing the cost of living: £11,100 p.a.z£22,200 p.a.5£33,300 p.a. Man and ‘poor girl’ sharing the cost of living: £11,100 p.a.z£27,750 p.a.5£38,850 p.a.


6. 7. 8. 9.

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Woman and ‘poor boy’ sharing the cost of living: £16,650 p.a.z£22,200 p.a.5£38,850 p.a. Woman and ‘poor girl’ sharing the cost of living: £16,650 p.a.z£27,750 p.a.5£44,400 p.a. Two ‘poor boys’ sharing the cost of living: £22,200 p.a.625£44,400 p.a. Two ‘poor girls’ sharing the cost of living: £27,750 p.a.625£55,500 p.a.

It seems that the 0.45 per cent of GDP p.a. (currently the UK GDP is £1440 billion) from which the one time Government Grant at Birth is drawn produces 44 times capital growth:

N N N

Boys: £5,0005(£11,100 p.a. pension income for 20 years) Girls: £7,5005(£16,650 p.a. pension income for 20 years) 20 per cent of births: # ‘Poor boys’: £10,000 }5(£22,200 p.a. pension income for 20 years) # ‘Poor girls’: £12,500 }5(£27,750 p.a. pension income for 20 years)

N N

When compared to the median family income which is currently £26,000 p.a. one could see how the suggested pension-savings model keeps the pensioner economically afloat during at least the initial 20 years of retirement: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Two men sharing the cost of living5£22,200 p.a. or 85.4 per cent of median family income. Man and woman sharing the cost of living5£27,750 p.a. or 106.7 per cent of median family income. Two women sharing the cost of living5£33,300 p.a. or 128.1 per cent of median family income. Man and ‘poor boy’ sharing the cost of living5£33,300 p.a. or 128.1 per cent of median family income. Man and ‘poor girl’ sharing the cost of living5£38,850 p.a. or 149.4 per cent of median family income. Woman and ‘poor boy’ sharing the cost of living5£38,850 p.a. or 149.4 per cent of median family income. Woman and ‘poor girl’ sharing the cost of living5£44,400 p.a. or 169.2 per cent of median family income. Two ‘poor boys’ sharing the cost of living5£44,400 p.a. or 169.2 per cent of median family income. Two ‘poor girls’ sharing the cost of living5£55,500 p.a. or 213.5 per cent of median family income.

It should be noted that all of the above pension income is received by the beneficiaries without any of them having made a single contribution. The cost to the community is estimated at under 0.5 per cent p.a. of GDP and the cash has been used for job and prosperity creating investments in the real economy.

Conclusion In our humble opinion, there are many advantages that the proposed Ten Pillars pension-savings and accumulation proposition could provide to the individual and society. Not only could such a pension-funding and accumulation program avert

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the danger of shameful poverty during retirement and the inter-generational tension that is anticipated if the current situation continues for much longer, but it will even have the power to alleviate class conflicts and even violent strife as the gap between them widens. It is obvious and very likely that there are many other variables that we did not think about in order to suggest a complete model. We believe that the task is overwhelming and thus the present draft of the pillars might be over estimating some aspects and probably underestimating others. We need, therefore, to find a way to model all the elements which make up the Defined Contributions pensions concept and compare it with the Ten Pillars new paradigm and its projected range of benefits. This would allow us to validate the Ten Pillars program proposition and draw our attention to aspects that evaded us. Nonetheless, we believe that this initial draft should trigger a fruitful discussion along the road to modify the defunct pension-savings’ model of the present time.

A few reflections This proposed pensions’ paradigm should enable governments to fund just part of the overall pension needs of their own workers and without having to bear the heavy burden of the country’s entire pension system (ultimate safety net). Overall state costs could go down over time, as governments become more efficient and reduce the size of the workforce working directly for them. Such a model also enables employers to stop having to worry about the need to continue to update and therefore to increase the funding of the Defined Benefits pensions of those who retire from their organisation, and also to enjoy lower overall pension costs for their future employees. The primary advantage of such a model is that the large sums of money that accumulate in the new pension accounts (Super Trusts) will be used to develop a new and dynamic economy; an economy that will create more productive workplaces and will reduce unemployment, under-employment and the need for very costly welfare subsidies for those at the bottom of the socio-economic ladder. To this end, the Ten Pillars model contributes significantly greater funding in the initial Government Grant at Birth for the children of poor families (20 per cent). This follows the many studies (Griggs & Walker, 2008) that have been conducted that show that the children of the poor experience 6 times more risk of themselves being poor at age 30 and therefore are significantly more likely to be a burden on society and on themselves for their whole life. Therefore, it is definitely economical for the United Kingdom on the whole to invest an additional £0.808 billion per year in the future pensions of the children of the poorest. It is important to note that the initial Government Grant at Birth must be a significant one. Through the new, relatively ‘insignificant tax’ (per household and per employee), the government will be able to grant every newborn a capital sum that can grow over 70 years of productive investment to reach a capital amount that will enable every person to have a basic living wage for at least 20 years of retirement. These pension payments will be funded through the realisation of accumulated real assets and will not be a burden on government coffers (less


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taxation) or on the pockets of companies that employ the individual over the course of the years. This, of course, will also reduce the danger looming today over many future pensioners, that they will experience ‘pension failure’ — a situation in which existing pension funds simply find themselves unable to meet their promises, even if the individual had contributed her/his part every month — since these funds are simply emptying out. The capital amount of the grant and everything that accumulates in the pensionsavings account over the years will not be in the custody of parents when the children are minors. It will be invested immediately in new investment structures (Super Trusts) whose sole mandate will be to invest in the real economy and not in stock-market ventures or other virtual speculations. The government will not be entitled to touch these accumulating funds. The sole owners of the accumulating pension funds will be the people in whose names the initial grants were made and even they will be entitled to begin benefitting from them only from age seventy — whether or not they continue to be employed. Thus, it will be possible to sever the comprehensive connection between employment and pension and to keep the decision about whether or not to retire as a matter between employers and employees, without damaging the rights of the worker to begin to draw income from his Ten Pillars retirement fund. The new Super Trusts entrusted with the grant money will function according to a special charter and precise laws and regulations. For example, instead of charging an annual percentage point or two from the value of the accumulating assets, the annual payment for managing these accounts will be closer to one tenth of one per cent. This difference alone, and the fact that there will be no charges for frequent sale or purchase of shares, will increase the rate of accumulation of the assets over the course of the years by tens of percentage points. The new Super Trusts will make long-term investments. They will pool their investments to reduce risk. They will not be influenced by the frenzied emotions that guide the activity of the stock market and the economy in the short term. They will not distribute dividends, and all of the accumulating monetary value will be invested and reinvested only in productive companies and in products that can provide an added value for the consumer (the one buying the product/service). The new Super Trusts will not pay huge salaries or extraordinary bonuses to their managers every time they conjure up large short-term returns. Reasonable bonuses will be paid for good results over years. The management culture in the many companies owned by the various Super Trusts will be based on responsibility for co-workers, consumers, and share-holders, i.e., future and present pensioners. As every child will be defined from the day of her birth as an investor, every adult will have a direct interest and stake in the economy. In other words, every citizen will understand that it is in his or her best interest to contribute to the development of the economy and society. This awareness, that one person’s success is everybody’s success, is expected to spread rapidly. The institutions of the new Super Trusts, which will be entrusted with investing the money of the future pensioners, have the potential to leverage the economy in creative, productive and accountable direction. Instead of the pension funds of the individual being invested on average for periods of about 10 years, as is the reality today, the Government Grant at Birth will be invested for a minimum of 70 years.

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Assuming a net income of 5 per cent per annum compounded, one can expect that every £1 invested at the time of a person’s birth will grow to £44 by the end of the average period of payment of the pension — again, according to a calculation of monthly pension payments being made up to the age of 90. We can think of the new Ten Pillars software, which we have called MaxiLife, as the twin sister of the Super Trusts. Together, these powerful twins can enable modern nations in the twenty-first century to achieve a balanced economy and society without fear of periodic economic and social crisis that threaten its very foundations or of compromising the basic dignity of any of its citizens.

A note for the future It is important to remember that over the years, the imperfections of any model may render it obsolete. Therefore in the future — at intervals of one or two generations — societies will have to reassess any pension-savings and accumulation model and look for ways to resolve its shortcomings, which will not only become apparent but are likely to be exacerbated in the long-term. If the coming generations do not do this, they will themselves bring about the collapse of their own economic and social systems. The coming generations will have to engrain in their leaders’ minds the somatic memory of the many cultures that have fallen and expired over the course of history and to educate them in the spirit of the saying that ‘nothing lasts forever.’

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Notes on contributor David Passig is a futurist who specialises in technological, social, and educational futures. He is Associate Professor at the Bar-Ilan University, Israel, where he heads the Graduate Program in Communication Technologies as well as the Virtual Reality Laboratory. He is a member of the Israeli National Commission for R&D. Correspondence to: Prof. David Passig, Bar-Ilan University, Ramat-Gan, Israel 52900. Email: [email protected] Moshe Gerstenhaber is the founder of a successful franchise organization providing a variety of high-quality print and design services in 200 branches throughout the UK. He has served on the boards of directors of prestigious institutions such as Middlesex University in London. Correspondence to: Moshe Gerstenhaber. Email: [email protected]