1 00:00:01,640 --> 00:00:04,400 So what's a funded pension? Well, 2 00:00:04,400 --> 00:00:11,420 a funded pension is one in which your pension is drawn completely from the realisation of returns on the investments of 3 00:00:11,420 --> 00:00:20,330 contributions into a pension fund that typically both you and your employer have made contributions into during your working life. 4 00:00:20,330 --> 00:00:24,950 Now, this fund might be held by just you as an individual, 5 00:00:24,950 --> 00:00:33,830 as in the case of traditional individual defined contribution pension pots or four or one K arrangements, which I discussed last week. 6 00:00:33,830 --> 00:00:38,950 Or the fund might be held collectively with others with whom one pools risks. 7 00:00:38,950 --> 00:00:42,200 Now the funded occupational defined benefit pension scheme, 8 00:00:42,200 --> 00:00:49,220 which was the topic of my first lecture and collect defined contribution, CDC, which was the topic of my second lecture. 9 00:00:49,220 --> 00:00:53,850 Each involve collective funding. No. 10 00:00:53,850 --> 00:00:59,580 Investment risk poses perhaps the greatest challenge for funded pensions. 11 00:00:59,580 --> 00:01:03,420 So especially in recent years, with government bond yields as low as they are, 12 00:01:03,420 --> 00:01:07,770 the low risk option of investment in long dated inflation linked to government 13 00:01:07,770 --> 00:01:12,690 bonds that match the pensions liabilities has become extremely expensive. 14 00:01:12,690 --> 00:01:18,240 In order, however, to reap the premium of higher expected returns on equity and property, 15 00:01:18,240 --> 00:01:23,790 one must contend with the risk that these returns will fall far short of expectation. 16 00:01:23,790 --> 00:01:31,400 The last two lectures, I considered a number of different ways in which individuals and collectives might try to manage these risks. 17 00:01:31,400 --> 00:01:32,400 Now, needless to say, 18 00:01:32,400 --> 00:01:40,730 none of these ways provides a foolproof method of dealing with the uncertainty of returns on investment in equities and property. 19 00:01:40,730 --> 00:01:44,630 Now, in light of the problems to which investment risk gives rise, 20 00:01:44,630 --> 00:01:49,040 I think would be worthwhile to consider the merits and promise of another form of pension provision, 21 00:01:49,040 --> 00:01:54,140 which doesn't involve the investment of contributions which have been deposited into a pension fund. 22 00:01:54,140 --> 00:02:05,960 Now, since you say D.C. and I say DBI in others say CDC, no CDC, perhaps we should not call the whole funded pension thing off. 23 00:02:05,960 --> 00:02:13,270 And that's why in today's lecture, I shall consider the case for pensions that are provided on an unfunded pay as you go basis. 24 00:02:13,270 --> 00:02:16,480 Now, with the pay as you go pension scheme, 25 00:02:16,480 --> 00:02:22,640 money is transferred from those who are currently working to pay the pensions of those who are currently retired. 26 00:02:22,640 --> 00:02:28,460 Like many other state pensions, those in the US and the UK are pay as you go. 27 00:02:28,460 --> 00:02:34,040 So rather than drawing from a pension fund consisting of a portfolio of financial assets, 28 00:02:34,040 --> 00:02:39,200 US and UK state pensions are paid out of annual tax revenues. 29 00:02:39,200 --> 00:02:43,550 Now, the pension one is entitled to retirement is, however, based on, 30 00:02:43,550 --> 00:02:51,110 even though not funded by the contributions one is made during one's working life in the form of a payroll tax. 31 00:02:51,110 --> 00:02:57,800 Now, in some countries, neither eligibility for the basic pay as you go state pension n level is conditional 32 00:02:57,800 --> 00:03:02,910 on contributions of portions of one's earnings during one's working life. 33 00:03:02,910 --> 00:03:11,490 Now these arrangements are more akin to other forms of welfare spending involving redistributive transfers funded solely by general taxation. 34 00:03:11,490 --> 00:03:15,330 Now, there remains a non-contributory residency requirement for eligibility, 35 00:03:15,330 --> 00:03:21,860 as in the case of other forms of welfare spending, in some cases it is merely a threshold residency requirement. 36 00:03:21,860 --> 00:03:25,560 All who've lived for give a number of years are eligible to the same degree. 37 00:03:25,560 --> 00:03:30,390 Now, in the Netherlands, the residency requirement is scaler rather than a threshold. 38 00:03:30,390 --> 00:03:34,590 So the level of the basic state pension to which one's entitled increases on the 39 00:03:34,590 --> 00:03:44,500 basis of the number of years that one has been a resident of the Netherlands. Now, many public sector occupational pensions are also pay as you go. 40 00:03:44,500 --> 00:03:53,360 So in the United Kingdom, the pensions of NHS workers, civil servants and members of the armed forces are on an unfunded pay as you go basis. 41 00:03:53,360 --> 00:04:02,260 Now, the teachers pension scheme in this country is another example, and it's of special relevance as a benchmark of comparison with USS. 42 00:04:02,260 --> 00:04:10,270 Because alongside teachers in primary and secondary schools, teachers in most of the universities that have been established since nineteen 43 00:04:10,270 --> 00:04:16,250 ninety two are also members of this pay as you go teachers pension scheme. 44 00:04:16,250 --> 00:04:21,960 Now, in the case of these public sector schemes, there are employee and employer contributions roughly, you know. 45 00:04:21,960 --> 00:04:25,950 So it's in that respect similar to private occupational schemes. 46 00:04:25,950 --> 00:04:28,020 But unlike funded schemes, 47 00:04:28,020 --> 00:04:35,430 the contributions go straight into the coffers of the Treasury rather than being invested as a portfolio of assets in a fund. 48 00:04:35,430 --> 00:04:40,110 And then pension payments also come from the Treasury's coffers. 49 00:04:40,110 --> 00:04:45,920 Now. The case for unfunded pay as you go, as opposed to funded pensions is, I think, 50 00:04:45,920 --> 00:04:52,910 strong when there are compelling grounds to redistribute income from those who have the good fortune to be high earners, 51 00:04:52,910 --> 00:04:56,420 to those who suffer the misfortune of lower earnings, 52 00:04:56,420 --> 00:05:01,970 where such redistribution cannot be achieved by means of the risk pooling of the earnings of different people, 53 00:05:01,970 --> 00:05:06,230 that's in the actual ex ante self-interest of all who enter the pool. 54 00:05:06,230 --> 00:05:17,540 So in other words, unfunded pay as you go is justified when we require the services of Robin Hood and not just insurance of a mutual association. 55 00:05:17,540 --> 00:05:26,330 Now, like a number of other unfunded pay as you go state pensions, the UK state pension is in fact highly redistributive from higher to lower earners. 56 00:05:26,330 --> 00:05:31,280 The amount that one contributes is proportional to one's income up to an income ceiling. 57 00:05:31,280 --> 00:05:35,030 But the amount of one's annual pension in retirement is proportional, 58 00:05:35,030 --> 00:05:43,460 and the UK simply did the number of years when it's worked and made mandatory contributions on income that exceeds a very low amount and therefore 59 00:05:43,460 --> 00:05:52,490 money is transferred from high earners to low earners with the goal of relieving poverty in old age on what has come to be known as the Beveridge, 60 00:05:52,490 --> 00:05:56,580 as opposed to the Bismarck approach to state pensions. 61 00:05:56,580 --> 00:06:03,550 Now, this sort of arrangement, highly redistributive, would probably not be in the actual ex ante self-interest, 62 00:06:03,550 --> 00:06:10,070 which to adopt at the point at which one leaves full time education and begins one's work and career. 63 00:06:10,070 --> 00:06:13,120 And that's because even at the early point of entering the workforce, 64 00:06:13,120 --> 00:06:19,360 each person probably has a fairly good idea of whether his expected earnings will be high or low. 65 00:06:19,360 --> 00:06:27,430 It would probably or maybe not be in the rational self-interest of those who expect to be high earners to choose a state pension along UK lines. 66 00:06:27,430 --> 00:06:35,920 They may need to impose a thicker hypothetical veil which deprives people of knowledge of their talents and therefore their earning potential 67 00:06:35,920 --> 00:06:42,940 in order to render in the rational softeners of each to choose such a redistributive state pension at the beginning of his adult life. 68 00:06:42,940 --> 00:06:49,630 No. Door Kenyon Lucke Egalitarian would offer just such a justification based on hypothetical 69 00:06:49,630 --> 00:06:55,460 insurance choices for an unfunded redistributive pay as you go state pension. 70 00:06:55,460 --> 00:07:05,720 Well, what I want to do is consider the question. Whether there is the reciprocity. 71 00:07:05,720 --> 00:07:14,760 B, for an unfunded pay as you go pension, such as the American or the UK state pension in particular, 72 00:07:14,760 --> 00:07:22,020 might such an argument provide a realisation of reciprocity in the roles and sense of fair terms of social cooperation for mutual advantage, 73 00:07:22,020 --> 00:07:26,530 which, while situates as follows in the quotation on the screen? 74 00:07:26,530 --> 00:07:33,880 Between altruistic impartiality and mere mutual that draws as in political liberalism, 75 00:07:33,880 --> 00:07:39,910 the idea of reciprocity lies between the idea of impartiality, which is altruistic, being moved by the general good. 76 00:07:39,910 --> 00:07:46,630 And the idea of mutual advantage understood as everyone's being advantaged with respect to each person's present or expected future situation, 77 00:07:46,630 --> 00:07:50,030 as things are, as that's understood in history, 78 00:07:50,030 --> 00:07:58,390 just as reciprocity is relation between citizens expressed by principles of justice that regulate a social world in which everyone benefits, 79 00:07:58,390 --> 00:08:05,070 judged with respect to an appropriate benchmark of equality defined with respect to that world. 80 00:08:05,070 --> 00:08:13,040 Now, the fact that people would prudently select redistributive pay as you go state pension from behind roles is hypothetical veil. 81 00:08:13,040 --> 00:08:19,110 Ignorance is, I think, insufficient to establish that it embodies this idea of reciprocity. 82 00:08:19,110 --> 00:08:20,340 Now, there are, I think, 83 00:08:20,340 --> 00:08:31,320 the following reasons why it's hard to interpret Rawls in solving the free choice behind the veil of ignorance as involving reciprocity. 84 00:08:31,320 --> 00:08:36,550 First, it doesn't involve an agreement or even [INAUDIBLE] for tat interaction between different individuals, 85 00:08:36,550 --> 00:08:40,170 but rather involves a cell phones for choice of a single individual's point. 86 00:08:40,170 --> 00:08:44,140 Jean Hampton made decades ago in second. 87 00:08:44,140 --> 00:08:51,500 The choice of self-interested only on the hypothetical assumption that the individual might turn out to be any member of society. 88 00:08:51,500 --> 00:09:01,400 Now, just to briefly elaborate on the second point. Ferrell, The voice was not in everyone's actual self-interest. 89 00:09:01,400 --> 00:09:07,840 Moreover, it's in everyone's ex ante self interest only by virtue of the imposition of a veil that renders one ignorant of one's fate, 90 00:09:07,840 --> 00:09:13,340 the normative appeal, the claim that the chosen option used to the advantage of each is undermined if we 91 00:09:13,340 --> 00:09:19,040 can provide such a justification only on the assumption that nobody knows who he is. 92 00:09:19,040 --> 00:09:27,040 Now, Rawls maintains that his original position models a fair system of cooperation for mutual advantage between free and equal persons, 93 00:09:27,040 --> 00:09:32,210 but on account of the impartiality of the choice of the bail insurers amongst symmetrically situated 94 00:09:32,210 --> 00:09:39,470 individuals would be chose me on the veil might constitute a fair system of cooperation amongst equals. 95 00:09:39,470 --> 00:09:45,010 But it might not be the mutual advantage to the mutual advantage of the parties. 96 00:09:45,010 --> 00:09:47,280 Now, the point that Brian Berry made a while ago, 97 00:09:47,280 --> 00:09:54,960 such choice behind the veil might be better understood as modelling impartial altruism than reciprocity. 98 00:09:54,960 --> 00:10:00,660 So we shouldn't be misled by Rawls. Is modelling involving self-interested choice into thinking that the terms of 99 00:10:00,660 --> 00:10:05,700 cooperation chosen in his original position are to the mutual advantage of each? 100 00:10:05,700 --> 00:10:12,780 So let's see if we can provide an account of the reciprocity of a pay as you go pension scheme, 101 00:10:12,780 --> 00:10:18,000 which doesn't require this hypothetical imposition of a Rausing in veil in order to see whether 102 00:10:18,000 --> 00:10:23,070 we can demonstrate that mutually advantageous changes nature of the scheme without the veil. 103 00:10:23,070 --> 00:10:29,670 Well, worker contributions that pay for the pensions of those in retirement in an unfunded pay as you go 104 00:10:29,670 --> 00:10:35,940 scheme are not in return for benefits that those in retirement confer on this group of workers. 105 00:10:35,940 --> 00:10:41,610 And therefore, what's going on in the pay as you go pension scheme differs from the typical bi 106 00:10:41,610 --> 00:10:47,520 directional form of reciprocity in which parties exchange benefits with one another. 107 00:10:47,520 --> 00:10:51,330 One might, however, try to draw an analogy between pay as you go. 108 00:10:51,330 --> 00:10:58,500 In other intergenerational arrangements, where these other in your generate rational arrangements are plausibly characterised as reciprocal, 109 00:10:58,500 --> 00:11:05,050 even though their unit directional in nature rather than involving this bi directional exchange between parties. 110 00:11:05,050 --> 00:11:15,600 Now. Rawls was so called just saving, Tibble might actually provide a nice illustration. 111 00:11:15,600 --> 00:11:20,460 Now, I won't go into details of his principal, but amongst the requirements of Bowles's just savings principle that each 112 00:11:20,460 --> 00:11:25,210 generation should save for the next at least as much as the previous generation, 113 00:11:25,210 --> 00:11:34,130 save for it. Rawls maintains that since generations are spread out in time and actual economic benefits flow in only one direction, 114 00:11:34,130 --> 00:11:39,210 there is no way for later generations to help up for that. 115 00:11:39,210 --> 00:11:43,560 For later generations to help the situation. Police force an earlier generation. 116 00:11:43,560 --> 00:11:52,020 When these generations are not overlapping so each generation therefore benefits the next generation by saving for it, 117 00:11:52,020 --> 00:11:56,250 but not in exchange for any benefit that the next generation confers on it. 118 00:11:56,250 --> 00:12:03,630 Now, in spite of its Unitech directional nature just flowing in one direction into the future, a case can be made that Rawls is just savings. 119 00:12:03,630 --> 00:12:10,500 Principle is in fact grounded in a principle of reciprocity involving the notion of fair return, 120 00:12:10,500 --> 00:12:16,200 where the fair return is now to a party other than the party from which one has received the benefit. 121 00:12:16,200 --> 00:12:21,030 Rather, any given generation is obliged to benefit the next generation. 122 00:12:21,030 --> 00:12:25,500 In return for benefits it's received from the previous generation. 123 00:12:25,500 --> 00:12:33,490 Now, adjust savings principal might be conceived as a form of cooperation insofar as it is to the mutual advantage of each. 124 00:12:33,490 --> 00:12:41,460 So along these lines, Rawls writes. If all parties are to gain, except perhaps the earlier ones, 125 00:12:41,460 --> 00:12:50,400 the parties must agree to savings principle that ensures that each generation receives its due from its predecessor and does its fair share. 126 00:12:50,400 --> 00:12:56,640 For those to come, perhaps the charge of free riding off of the efforts of others can be invoked 127 00:12:56,640 --> 00:13:00,500 to condemn those who benefit from the savings of their ancestors without, 128 00:13:00,500 --> 00:13:04,960 in turn passing on comparable savings to their descendants. 129 00:13:04,960 --> 00:13:11,110 Now, though, this would not involve an appeal, the reciprocity in the ordinary sense involving bi directional exchanges, 130 00:13:11,110 --> 00:13:16,540 it might be thought to involve a version of reciprocity more widely understood. 131 00:13:16,540 --> 00:13:25,250 No. In a manner analogous to that of an unfunded pay as you go pension scheme, 132 00:13:25,250 --> 00:13:29,300 but at the level of individual members of the family across overlapping generations, 133 00:13:29,300 --> 00:13:37,610 can be more has argue that conformity to a norm of benefiting one's elders might be a mutually advantageous Nash equilibrium, 134 00:13:37,610 --> 00:13:45,050 which is to say, an equilibrium in which each does better for himself by conforming rather than defecting. 135 00:13:45,050 --> 00:13:51,940 Given the choices of others. So this is can Benmore is case involves what we might think of, 136 00:13:51,940 --> 00:13:59,210 as is the slight extension of my Robinson Crusoe case from last week, whether it's just a single individual on this desert island. 137 00:13:59,210 --> 00:14:09,100 Now we have more than one individual. He says. Imagine a world which only a mother and a daughter are alive at any time. 138 00:14:09,100 --> 00:14:15,780 Each player lives for two periods. The first word is, are you? 139 00:14:15,780 --> 00:14:21,990 And the second is our old age. In her youth, the player bakes two large loaves of bread. 140 00:14:21,990 --> 00:14:28,740 She then gives birth to a daughter and immediately grows old. Old players are too feeble to work and so produce nothing. 141 00:14:28,740 --> 00:14:33,330 One equilibrium requires each player to consume both her loaves of bread in her youth. 142 00:14:33,330 --> 00:14:41,600 Everyone will then have to endure a miserable old age. But in this case, everyone will be optimised, given the choices of others. 143 00:14:41,600 --> 00:14:45,140 Well, all players would prefer to consume one loaf in their youth. 144 00:14:45,140 --> 00:14:52,130 And one love in old age to spread out their consumption into old age. 145 00:14:52,130 --> 00:14:55,670 But this fair outcome can only be achieved at the daughters. 146 00:14:55,670 --> 00:15:01,250 I'll give one of their loaves to their mothers because bread perishes if not consumed when baked. 147 00:15:01,250 --> 00:15:06,680 So a world in which each conforms to a norm of sharing with one's elder is better for each. 148 00:15:06,680 --> 00:15:14,850 In a world in which nobody conforms, or rather each person hoards benefits for herself rather than giving anything to anyone else. 149 00:15:14,850 --> 00:15:25,020 Now been more then goes on to offer the following explanation of how conformity to enormous sharing might emerge. 150 00:15:25,020 --> 00:15:31,480 Well, he says. He knows mothers can't retaliate. With their daughter. 151 00:15:31,480 --> 00:15:37,710 Selfish. But the fair outcome could nevertheless be sustained as an equilibrium. 152 00:15:37,710 --> 00:15:43,820 So in this fair equilibrium. Conformance is a player who gives her mother a loaf if and only if this is the norm. 153 00:15:43,820 --> 00:15:51,950 Give your mother love. If and only if her mother was a conformist in her youth. So conformists, therefore reward other conformists. 154 00:15:51,950 --> 00:16:01,460 And punish nonconformists. So to see why a daughter gives her mother a loaf supposes Alice, Beatrice and Carol are mother, daughter and granddaughter. 155 00:16:01,460 --> 00:16:10,550 If Beatrice neglects the Alice, then she becomes a nonconformist. And Carol, therefore punishes Beatrice to avoid becoming a nonconformist herself. 156 00:16:10,550 --> 00:16:14,680 If not, she'll be punished by her daughter and so on. 157 00:16:14,680 --> 00:16:24,160 If it had been more, says the first forum, players deemed to be a conformist is therefore appropriate equilibrium for everyone to be a conformist. 158 00:16:24,160 --> 00:16:30,030 Everyone is better off than they could otherwise be. Given the choices of others. 159 00:16:30,030 --> 00:16:36,060 Joseph Heath has employed a similar model to try to show that unfunded pay as you go pension 160 00:16:36,060 --> 00:16:42,450 schemes embody a form of indirect reciprocity involving intergenerational cooperation, 161 00:16:42,450 --> 00:16:52,420 where benefits flow in one direction only. So workers of one generation pay for the pensions of those in retirement at that time. 162 00:16:52,420 --> 00:16:58,510 In return for having their pensions paid for the next generation of workers when they retire. 163 00:16:58,510 --> 00:17:05,480 He describes a motivation to contribute, to pay as you go university pension in the following terms, he says. 164 00:17:05,480 --> 00:17:11,390 Every month, a fairly large portion of my salary is deducted from my paycheque and essentially 165 00:17:11,390 --> 00:17:15,590 handed over to one of my America's colleagues at the end of the year, 166 00:17:15,590 --> 00:17:24,200 I'm sent a letter telling me what my own anticipated monthly pension will be based on my current salary and accumulated years of service. 167 00:17:24,200 --> 00:17:27,110 But he says it's nothing more than a promise and a weak one at that. 168 00:17:27,110 --> 00:17:32,240 It's hostage to all the vicissitudes of employee employer bargaining over the next 20 years. 169 00:17:32,240 --> 00:17:36,140 So then he asks this question, so why do I agree to this? And his answer is as follows. 170 00:17:36,140 --> 00:17:43,850 He says it's because I'm confident that when I'm older and retired, there will be a new generation of young professors. 171 00:17:43,850 --> 00:17:49,820 We're willing to do the same thing for me that I'm currently doing for my emeritus colleagues. 172 00:17:49,820 --> 00:17:59,250 Let me ask you why you like nation willing to hand over five percent of their salary to me in a while ago, 173 00:17:59,250 --> 00:18:03,740 an employee contributions weren't as high as they are now. He says certainly. 174 00:18:03,740 --> 00:18:06,650 Why should I expect the next generation be willing to hand over five percent of their salary? 175 00:18:06,650 --> 00:18:13,330 Certainly not out of gratitude for the fact that I am doing so now to the benefit of my older colleagues. 176 00:18:13,330 --> 00:18:19,990 Rather, because I expect them to expect that they will someday have younger colleagues who will do the same for them. 177 00:18:19,990 --> 00:18:24,730 That is that the change of cooperation will continue on into the future unbroken. 178 00:18:24,730 --> 00:18:30,130 Whether the pension scheme will remain, as I say, a going concern. 179 00:18:30,130 --> 00:18:40,610 Unlike Ben Moore's case in which one's contribution is directed towards a single individual to whom one house special ties one's mother, 180 00:18:40,610 --> 00:18:45,940 workers pensions contributions are anonymously spread out amongst a group of strangers. 181 00:18:45,940 --> 00:18:48,310 So the choice of individuals to make contributions to a large, 182 00:18:48,310 --> 00:18:55,990 anonymous scheme can't readily be explained as a socially enforced norm that gives rise to a Nash equilibrium. 183 00:18:55,990 --> 00:19:02,300 Rather, the need for enforcement mechanisms which ultimately involve the threat of state imposed penalties. 184 00:19:02,300 --> 00:19:14,860 Now, in the case of employer based pay as you go, pensions members don't actually voluntarily pay pensions contributions into employer scheme. 185 00:19:14,860 --> 00:19:16,510 On your understanding that if they do that, 186 00:19:16,510 --> 00:19:24,310 the next generations of workers will voluntarily pay into the pension scheme as well in accordance with normal conformity, 187 00:19:24,310 --> 00:19:31,550 which is an Nash equilibrium? Rather, what underpins such a pension scheme is rather a standard bilateral, 188 00:19:31,550 --> 00:19:37,100 reciprocal than legally enforceable contract between the members of a given generation 189 00:19:37,100 --> 00:19:41,810 and the institution that promises them a pension in return for their contribution. 190 00:19:41,810 --> 00:19:48,130 Where this institution is the state in the case of a public sector pension scheme. 191 00:19:48,130 --> 00:19:54,040 Now, a pay as you go defined benefit, private occupational pension would also involve a promise by the employer. 192 00:19:54,040 --> 00:19:54,490 Moreover, 193 00:19:54,490 --> 00:20:05,110 employer based pay as you go pensions could not be sustained in the absence of such an enforceable promise that the employer extends to workers. 194 00:20:05,110 --> 00:20:10,810 Now, the case of a state pay as you go pension contributions are explained by the fact that 195 00:20:10,810 --> 00:20:16,000 the state makes a mandatory in a manner that's backed up by threat of punishment. 196 00:20:16,000 --> 00:20:23,080 The state could not rely on individuals voluntarily making contributions in accordance with a norm that 197 00:20:23,080 --> 00:20:30,470 gives rise to a Nash equilibrium anymore than they could rely on the voluntary payment of other taxes. 198 00:20:30,470 --> 00:20:35,690 So if a voluntary norm in Nash equilibrium along the lines of what Ben Moore 199 00:20:35,690 --> 00:20:40,730 sketched plays any role in explaining how state pensions are sustained over time, 200 00:20:40,730 --> 00:20:49,420 I think we'll need to be at the level of the collective of the demos the electorate, rather than at the level of individuals. 201 00:20:49,420 --> 00:20:51,640 State pensions contributions are mandatory, 202 00:20:51,640 --> 00:20:58,870 but states tend to provide themselves with a fair amount of discretion in the pensions they end up paying people in retirement. 203 00:20:58,870 --> 00:21:02,950 So unlike a contract between employer and employee for an occupational pension, 204 00:21:02,950 --> 00:21:09,630 the state pension is not, in fact, underpinned by a file by a bilateral reciprocal contract. 205 00:21:09,630 --> 00:21:14,040 That's legally enforceable between the state and the individual in which the state 206 00:21:14,040 --> 00:21:20,250 promises each individual given level of pension in exchange for his contributions. 207 00:21:20,250 --> 00:21:25,230 Rather, the state pension can and has been altered, the Democratic will. 208 00:21:25,230 --> 00:21:26,940 The fact, however, 209 00:21:26,940 --> 00:21:35,490 that states continue to voluntarily pay pensions might be explained by the following Nash equilibrium at the level of the collective. 210 00:21:35,490 --> 00:21:42,210 Voters democratically choose to continue to make contributions to pay for the pensions of those in retirement, 211 00:21:42,210 --> 00:21:46,450 not just because the elderly vote in disproportionate numbers. 212 00:21:46,450 --> 00:21:53,320 But because workers realise that if they vote to stop making contributions towards the pensions of those in retirement, 213 00:21:53,320 --> 00:21:56,440 stop paying their national insurance contributions, 214 00:21:56,440 --> 00:22:02,730 then the next generations of workers will vote against making contributions towards their retirement. 215 00:22:02,730 --> 00:22:07,440 Now, assuming that the members of the different generations are equally situated, 216 00:22:07,440 --> 00:22:15,990 this mutually advantageous Natalie Nash equilibrium might be described as an instance of the type of roles and reciprocity that I introduced earlier, 217 00:22:15,990 --> 00:22:26,130 one in which a relation between citizens is expressed by principles of justice that regulate a social world which everyone benefits, 218 00:22:26,130 --> 00:22:31,830 judged with respect to an appropriate benchmark of equality, quoting recording from awls earlier. 219 00:22:31,830 --> 00:22:39,900 But as we shall see in a moment. However, the assumption that the members of the different generations are equally situated is unsound. 220 00:22:39,900 --> 00:22:42,810 The first generation is, in fact, privileged over others. 221 00:22:42,810 --> 00:22:48,160 And hence we don't actually have this requisite benchmarking of equality amongst all the generations. 222 00:22:48,160 --> 00:22:57,790 So here's the unfairness of the first generation. In actual fact, usually United States, the United Kingdom. 223 00:22:57,790 --> 00:23:06,580 Unfunded. Pay as you go, state pensions devolve the prima fascia unfairness of the first generation getting a free ride since they made few, 224 00:23:06,580 --> 00:23:10,780 if any, contributions into the system. So the first American, for example, 225 00:23:10,780 --> 00:23:16,450 to receive a monthly Social Security cheque had paid only twenty four dollars and seventy five cents in contributions 226 00:23:16,450 --> 00:23:24,220 over three years before she received her first monthly cheque of actually twenty two dollars and fifty four cents. 227 00:23:24,220 --> 00:23:28,670 Now after her second cheque. She had already received more than she had contributed, 228 00:23:28,670 --> 00:23:37,730 and she ultimately reached her 100th birthday and collected a total of twenty two thousand eight hundred eighty eight dollars and ninety two cents. 229 00:23:37,730 --> 00:23:43,010 Now, here's the theoretical possibility. I just interesting. 230 00:23:43,010 --> 00:23:54,450 Theoretically, at least in theory. We could construct an almost entirely unfunded pay as you go state pension scheme in which the first generation 231 00:23:54,450 --> 00:24:01,020 to receive a pension in retirement makes contributions into the scheme throughout their working lives. 232 00:24:01,020 --> 00:24:07,770 But unlike a normal pay as you go scheme, these contributions don't go towards any pension and payment at the time. 233 00:24:07,770 --> 00:24:13,260 Since my hypothesis, there are Arnon's first generation to contribute to pay as you go pension. 234 00:24:13,260 --> 00:24:23,410 But now suppose that these contributions were instead invested. Ring fenced, held under the payment. 235 00:24:23,410 --> 00:24:28,270 Of. OK. So, so, so, so first, 236 00:24:28,270 --> 00:24:34,610 suppose that the first generation's contributions are instead invested Ring-fence and held reserve for the payment of their own future pensions. 237 00:24:34,610 --> 00:24:37,030 The same arrangement was applied to all subsequent generations, 238 00:24:37,030 --> 00:24:42,510 while in that case we would just transform the arrangement into a funded pension scheme. 239 00:24:42,510 --> 00:24:45,520 But now suppose a different possibility. 240 00:24:45,520 --> 00:24:55,380 Suppose that the pensions contributions of the first generation were instead invested ring-fence and held in reserve. 241 00:24:55,380 --> 00:25:00,880 To pay and retirement the final generation. 242 00:25:00,880 --> 00:25:06,600 Of contributors during their working lives. In the event of the eventual scheme, closure. 243 00:25:06,600 --> 00:25:11,890 Now, in this case, all generations were equally situated insofar as each generation which receives a 244 00:25:11,890 --> 00:25:16,610 pension would also make contributions that pay for the pensions of another generation. 245 00:25:16,610 --> 00:25:23,050 And hence each generation would pay the pensions of the previous generation and take, well, typically unfunded pay as you go fashion, 246 00:25:23,050 --> 00:25:28,270 except for the first generation whose contributions would look forward to the final generation. 247 00:25:28,270 --> 00:25:33,640 And that, by the way, explains the photograph on the title page. 248 00:25:33,640 --> 00:25:37,820 There's the looping for that supposed to be represented by that photograph. 249 00:25:37,820 --> 00:25:47,510 Now, apart from the fact that the first generation's contribution to be held and invested in a fund for the last generation, 250 00:25:47,510 --> 00:25:54,620 this would actually be an unfunded pay as you go realisation of an indirect form of roles in reciprocity. 251 00:25:54,620 --> 00:25:57,980 Reciprocity obtains which each generation both contribute just to another generation's 252 00:25:57,980 --> 00:26:03,980 pension and receives contributions for its own pensions from another generation. 253 00:26:03,980 --> 00:26:11,540 Now, this looping arrangement would, incidentally, also provide a solution to the problem of backward induction that's been pressed 254 00:26:11,540 --> 00:26:18,130 against pay as you go scheme schemes where it's known that they will eventually close. 255 00:26:18,130 --> 00:26:22,100 We know there's going to eventually close or if you know when it's going to close and you're going to 256 00:26:22,100 --> 00:26:26,480 stop contributing into it because you know that there will be no one in the future to contribute for you. 257 00:26:26,480 --> 00:26:29,930 But then the next generation before that will stop contributing and so forth. 258 00:26:29,930 --> 00:26:34,580 So it zips back to the guidance and public, Gustafer Annual says, as has raised against the pay as you go scheme. 259 00:26:34,580 --> 00:26:39,570 And this provides a solution to that problem. It is, however. 260 00:26:39,570 --> 00:26:43,180 A merely interesting theoretical possibility. 261 00:26:43,180 --> 00:26:51,640 I think no, actually existing pay as you go scheme has ever involves such a looping forward arrangement with the first generation of contributors. 262 00:26:51,640 --> 00:26:57,760 Contributions are ring fenced and invested for eventual scheme closure generations in the future. 263 00:26:57,760 --> 00:27:04,760 Nor, I think, is it likely at all that such a scheme will be implemented in the future. 264 00:27:04,760 --> 00:27:12,710 But this merely theoretically interesting possibility does, however, set the stage for the consideration of another version of pay as you go, 265 00:27:12,710 --> 00:27:24,630 which I think realises reciprocity in so far is each generation both fully contributes to and receives from an ongoing pension scheme. 266 00:27:24,630 --> 00:27:30,080 Now, this particular pay as you go arrangement, which I would now like to turn to. 267 00:27:30,080 --> 00:27:38,030 Involves a notional funding of all pensions promises, including those of the first generation of pensioners. 268 00:27:38,030 --> 00:27:44,870 In fact, isn't this this isn't merely an interesting, interesting theoretical possibility that actually has been realised. 269 00:27:44,870 --> 00:27:53,640 Practise and live under. There you go. And since I think it has many virtues, I'd like to consider the case for it. 270 00:27:53,640 --> 00:28:00,510 What I'm going to do for the remainder of today's lecture is consider the case for notionally funded pay as you go scheme. 271 00:28:00,510 --> 00:28:10,780 And here's how notionally funded pay as you go scheme works. As in the case of funded, defined benefit pension schemes, which I discussed in week one, 272 00:28:10,780 --> 00:28:19,660 workers and employers put in pensions contributions each year in return for which they're promised a pension in retirement. 273 00:28:19,660 --> 00:28:24,100 The pensions of every member of this pay as you go scheme, including those are the very first generation, 274 00:28:24,100 --> 00:28:31,600 are, moreover, directly proportional to the level of their contributions throughout their working lives. 275 00:28:31,600 --> 00:28:38,230 Therefore, the first generation of pensioners does not ride free on the contributions of younger workers. 276 00:28:38,230 --> 00:28:43,350 And so the complaints are raised against pay as you go. State pensions a few moments ago doesn't apply. 277 00:28:43,350 --> 00:28:52,040 Now, you know, United Kingdom public sector pay as you go. Pension schemes provide a good example of how such notional funding works in practise. 278 00:28:52,040 --> 00:29:00,740 The cost of the pensions that public sector workers in this country are promised is covered by the contributions of employers and numbers. 279 00:29:00,740 --> 00:29:07,530 And then plops in this room right here on these contributions. 280 00:29:07,530 --> 00:29:15,570 Now, this assumed rate of return also serves as the rate at which the pensions liabilities are discounted, serves as the discount rate. 281 00:29:15,570 --> 00:29:20,250 Now, as in the case of a generally funded, defined benefit pension, the higher this assumed rate of return, 282 00:29:20,250 --> 00:29:24,570 the lower the contributions required for a pension of a given level. 283 00:29:24,570 --> 00:29:28,080 Now here, however, the funding is merely notional. 284 00:29:28,080 --> 00:29:35,280 It's not actual since contributions are not placed into a fund which is genuinely invested in assets. 285 00:29:35,280 --> 00:29:40,780 Rather, the contributions go into the coffers of the U.K. Treasury. Well, question. 286 00:29:40,780 --> 00:29:46,430 How is this notional rate of return set? 287 00:29:46,430 --> 00:29:54,750 Well, it said not as the expected rate of return are on the capital of a hypothetical portfolio of financial assets. 288 00:29:54,750 --> 00:30:03,000 Not even a hypothetical portfolio, let alone an actual portfolio, but rather our asset as the expected, long as they are the discount rate is that, 289 00:30:03,000 --> 00:30:13,440 as expected, long term rate of growth, g of the economy or the expected long term gross domestic product growth. 290 00:30:13,440 --> 00:30:21,270 Growth rate of GDP. Well, what's the rationale for setting the discount rate as G. 291 00:30:21,270 --> 00:30:32,190 Well, the rationale is that pay as you go pensions are funded by tax revenues, which grow roughly in line with the growth in the economy, 292 00:30:32,190 --> 00:30:37,230 and hence the hypothetical assets of the scheme are metaphorically conceived as claims on future tax revenues. 293 00:30:37,230 --> 00:30:45,480 So, as the Treasury has explained, the government is not persuaded that rate consistent with the private sector and other funded schemes, 294 00:30:45,480 --> 00:30:52,040 would be an appropriate choice as the discount rate used to set unfunded pension scheme contributions. 295 00:30:52,040 --> 00:30:59,640 That discount rate reflects the cost inherent in a scheme backed by a portfolio of assets, traded bonds and equities, 296 00:30:59,640 --> 00:31:07,130 which are held by the unfunded public service schemes where the assets are claims on future tax revenues, unquote. 297 00:31:07,130 --> 00:31:15,080 Now, in setting the rate of return on pensions contributions as the rate at which tax revenues are expected to grow. 298 00:31:15,080 --> 00:31:25,230 The Treasury maintained that they thereby take into account the costs that's passed to future taxpayers on a fair and sustainable basis. 299 00:31:25,230 --> 00:31:33,640 That seems like a plausible claim. No. There are some efficiency based grounds or there would be some efficiency based grounds for preferring 300 00:31:33,640 --> 00:31:40,150 a pay as you go to a genuinely funded pension scheme such as the low cost of administration. 301 00:31:40,150 --> 00:31:48,540 In contrast, the relatively high cost of good management of the asset portfolios of funded pension scheme. 302 00:31:48,540 --> 00:31:58,080 And spray notionally funded pay as you go pension scheme might be especially forthcoming when G is greater than R, 303 00:31:58,080 --> 00:32:03,390 where G represents a rate of per capita, not merely aggregate growth, but the economy. 304 00:32:03,390 --> 00:32:04,230 In that case, 305 00:32:04,230 --> 00:32:11,700 it should be possible to provide better pensions for all by means of a notionally funded pay as you go scheme which pensions are paid out of tax 306 00:32:11,700 --> 00:32:16,590 revenues that increase at the rate of G as compared with a genuinely funded 307 00:32:16,590 --> 00:32:23,980 scheme whose assets grow at this assumed lower rate of return on Capital R. 308 00:32:23,980 --> 00:32:29,050 Such a notionally funded pay as you go pension scheme could be justified as to the reciprocal mutual vange of each. 309 00:32:29,050 --> 00:32:31,570 In comparison with a genuinely funded scheme. 310 00:32:31,570 --> 00:32:41,710 Now, if Thomas Piketty is right, however, that it was an aberration, that G was greater than are due in the 20th century and that is greater than G. 311 00:32:41,710 --> 00:32:49,090 For substantial and that are is greater than G as the historical norm throughout most of history. 312 00:32:49,090 --> 00:32:56,050 Well, that would undermine this efficiency based case for pay as you go overfunded provision of pensions promises, 313 00:32:56,050 --> 00:33:05,020 at least during the next several decades. If ours is greater than, gee, it undermines but does not defeat the case for pay as you go, 314 00:33:05,020 --> 00:33:09,760 since, as I hope now to show case can be made for pay as you go. 315 00:33:09,760 --> 00:33:19,410 Even when AH is greater than gee, which is to say, even when the rate of return on capital exceeds the rate of growth of the economy. 316 00:33:19,410 --> 00:33:25,200 To make this case, what I'd like to do is begin by drawing attention to some, I think, 317 00:33:25,200 --> 00:33:32,040 striking parallels between a notionally funded pay as you go defined benefit scheme and a genuinely funded one, 318 00:33:32,040 --> 00:33:38,520 where these parallels shed light on what a notionally funded pay as you go pension actually consists of. 319 00:33:38,520 --> 00:33:42,590 And when the case for it will be compelling. 320 00:33:42,590 --> 00:33:52,760 Now, as I mentioned in my first lecture, some people maintain that defined benefit scheme should purchase and hold long dated inflation index linked. 321 00:33:52,760 --> 00:34:02,420 Government bonds. He says the fund matched the liabilities of the pensions promises. 322 00:34:02,420 --> 00:34:06,840 I made the case for a less expensive funding by means of growth assets. 323 00:34:06,840 --> 00:34:14,340 Well, I me make a different point. Now we're going to revisit the case for funding DBI by growth assets. 324 00:34:14,340 --> 00:34:18,080 The different point I wanna make now is that pensions contributions for a notionally 325 00:34:18,080 --> 00:34:22,700 funded pay as you go scheme actually constitute the purchase of government bonds. 326 00:34:22,700 --> 00:34:32,830 And here's why. To think about what's going on in the notionally funded pay as you go scheme, such as the teachers pension scheme. 327 00:34:32,830 --> 00:34:42,280 In exchange for employer and member pensions contributions that go to the Treasury's coffers, the government makes promises. 328 00:34:42,280 --> 00:34:50,020 To teachers to pay pensions, such promises amount to illiquid, non tradable government annuity bonds. 329 00:34:50,020 --> 00:34:56,290 What's the yield on these bonds? The yield of these annuity bonds is the discount rate, which is G the rate, 330 00:34:56,290 --> 00:35:05,160 which is a rate of return on these contributions set to the long term growth and the rate of the economy. 331 00:35:05,160 --> 00:35:15,450 The long term rate of growth in the economy, as currently forecast by the UK government, is CPI plus two point four percent. 332 00:35:15,450 --> 00:35:22,580 That's the discount rate of the public sector pension schemes. 333 00:35:22,580 --> 00:35:22,830 Now, 334 00:35:22,830 --> 00:35:33,000 such a new annuity bonds have quite an attractive yield relative to the long dated inflation index bonds that the government issues were long dated. 335 00:35:33,000 --> 00:35:39,550 Inflation indexed bonds have returns about two percent below CPI at the moment. 336 00:35:39,550 --> 00:35:45,650 Now, if such annuity bonds that are issued to the teacher's pension scheme like were publicly tradable. 337 00:35:45,650 --> 00:35:50,590 Funded defined benefit pension schemes alone would create enormous demand for them. 338 00:35:50,590 --> 00:35:56,910 And therefore, pay as you go, public sector schemes such as the teachers pension scheme are in effect government bond funded schemes, 339 00:35:56,910 --> 00:36:01,420 but with a much better yield of CPI plus two point four percent than the long dated, 340 00:36:01,420 --> 00:36:14,070 indexed linked bonds, which some financial economists maintain should largely constitute the portfolios of privately funded, defined benefit pensions. 341 00:36:14,070 --> 00:36:21,300 A yield of CPI plus two point four percent is not as high as expected long term return on equities, 342 00:36:21,300 --> 00:36:29,900 which is now in the vicinity of CPI plus four percent. But unlike in the case of equities investment, there is no risk to the asset holder. 343 00:36:29,900 --> 00:36:37,050 The employers and members who pay the contributions in exchange for the government issued annuities don't bear on the investment risk. 344 00:36:37,050 --> 00:36:45,910 Well, should a pension scheme prefer to invest more cheaply in risky equities with the higher expected return or. 345 00:36:45,910 --> 00:36:51,990 In the government annuity that has a rate of return pegged to the forecast growth of the economy. 346 00:36:51,990 --> 00:36:57,000 Well, perhaps rather than expose themselves to the downside risks of equities, 347 00:36:57,000 --> 00:37:03,300 I'm sure that many would leave with the chance to purchase liability matching assets with the government guaranteed return. 348 00:37:03,300 --> 00:37:11,940 CPI plus two point four percent rather than index linked bonds of CPI minus two percent. 349 00:37:11,940 --> 00:37:18,160 Well, issues of fairness might therefore be thought to arise on account of the fact that the government is issuing 350 00:37:18,160 --> 00:37:24,660 the exclusive be selling annuity bonds at well below their market value to only some workers and employers, 351 00:37:24,660 --> 00:37:30,700 namely those who qualify for membership in public sector pay as you go schemes. 352 00:37:30,700 --> 00:37:37,030 So what grounds, for example, are there for the government to make these bonds available for purchase by the new K, 353 00:37:37,030 --> 00:37:42,490 U, K or the new UK universities, the so-called Post 92 sector, 354 00:37:42,490 --> 00:37:50,920 who enjoy membership in the teacher's pension scheme while refusing to sell such annuity bonds to the older universities and colleges, 355 00:37:50,920 --> 00:37:54,940 which are members of USS? And why, for that matter? 356 00:37:54,940 --> 00:38:03,910 Does the UK government make these annuity bonds available to Eton College, which is also a member of the teacher's pension scheme? 357 00:38:03,910 --> 00:38:10,060 But not to any of the universities in the UK founded before nineteen ninety two. 358 00:38:10,060 --> 00:38:20,990 Now, to overcome such invidious snice and unfairness. Why not make these annuity bonds available to all employers and workers in the private sector? 359 00:38:20,990 --> 00:38:27,920 Here's a related question. I would now like to pose to those who call for private sector defined benefit pensions 360 00:38:27,920 --> 00:38:35,510 to be funded out of a portfolio of long dated inflation indexes and government bonds. 361 00:38:35,510 --> 00:38:44,120 What explains your preference for funding such pensions at the lower discount rate of index-linked government bonds 362 00:38:44,120 --> 00:38:51,980 rather than the higher discount rate than annuity bonds that governments make available to public sector schemes? 363 00:38:51,980 --> 00:38:59,970 Is it because the yield so you claim on long dated index-linked bonds as set by the free market? 364 00:38:59,970 --> 00:39:05,930 Whereas the CPI plus two point four percent yield of annuity bonds is the product of an unfree market, 365 00:39:05,930 --> 00:39:10,010 given restrictions on who can purchase them and the inability to trade them well. 366 00:39:10,010 --> 00:39:17,190 But, of course, the yield on long dated, indexed linked bonds is not determined by a free market. 367 00:39:17,190 --> 00:39:24,390 Given how outsized the player the government is in this market under quantitative easing. 368 00:39:24,390 --> 00:39:30,690 Bond yields are as low as they are on account of the central banks injection of money into the economy 369 00:39:30,690 --> 00:39:36,360 through quantitative easing involving the buying back of government bonds held by insurance companies, 370 00:39:36,360 --> 00:39:44,070 pension funds, banks and other institutions. And moreover, quantitative easing is a public policy choice. 371 00:39:44,070 --> 00:39:53,130 The purpose is to stimulate demand, but demand could be more effectively stimulated through the more widespread issuing and selling, 372 00:39:53,130 --> 00:39:55,800 not just to public sector employees and workers, 373 00:39:55,800 --> 00:40:03,120 but to workers more generally of the sort of annuity bonds that the government now sells to those in the public sector. 374 00:40:03,120 --> 00:40:13,900 A widespread selling of the sorts of annuity bonds are there for the public sector would stimulate consumer demand on account of pensioners. 375 00:40:13,900 --> 00:40:18,640 Having more money to spend in greater demand would also arise from firms having more 376 00:40:18,640 --> 00:40:25,940 money to invest or otherwise spend on things other than pensions contributions, such as the salaries of their workers. 377 00:40:25,940 --> 00:40:33,350 And it's ultimately a matter of choice on the part of the government. What sorts of bonds to issue and to whom? 378 00:40:33,350 --> 00:40:40,080 Now, of course, doing what I've suggested, issuing these annuity bonds across the economy, 379 00:40:40,080 --> 00:40:45,860 not just to the public sector, might have undesirable effects that would tell against doing so. 380 00:40:45,860 --> 00:40:54,860 I mean, it might give rise to too much inflation or the crowding out of government borrowing from investment in infrastructure and the like. 381 00:40:54,860 --> 00:41:00,270 But. It's still a matter of government policy choice and should be analysed along these lines. 382 00:41:00,270 --> 00:41:06,930 The government can choose to issue CPI plus two point four percent annuities in greater volume and 383 00:41:06,930 --> 00:41:14,460 make them more widely available to workers and employers is nothing magical about the current yield. 384 00:41:14,460 --> 00:41:20,040 CPI minus two percent of index linked government bonds. 385 00:41:20,040 --> 00:41:26,130 So what I want to do now. You step back. 386 00:41:26,130 --> 00:41:34,880 And restate the case I've been developing for collective pensions in this lecture and the previous two. 387 00:41:34,880 --> 00:41:40,280 Now, my last lecture, I showed how CDC converges on defined benefit. 388 00:41:40,280 --> 00:41:48,770 I've now just shown how notionally funded pay as you go public sector defined benefit also converges on funded defined benefit. 389 00:41:48,770 --> 00:41:57,680 So climbing the mountain from different sides. All of these approaches converge on a similar form of collective pensions provision, 390 00:41:57,680 --> 00:42:03,650 which breaks open the silos of individual defined contribution pension pots and avoids the 391 00:42:03,650 --> 00:42:10,340 exorbitant expense of funding that's pegged to long dated index-linked government bonds. 392 00:42:10,340 --> 00:42:19,280 Now, whether it ultimately takes a form of CDC, a genuinely funded, defined benefit scheme or notionally funded pay as you go defined benefits scheme. 393 00:42:19,280 --> 00:42:27,220 We've converged on a collective, multigenerational society wide form of pensions provision. 394 00:42:27,220 --> 00:42:33,150 So what to do now is wrap up. By posing the following question. 395 00:42:33,150 --> 00:42:39,690 Why should those of you who are young, able bodied and productive. 396 00:42:39,690 --> 00:42:44,850 Pay for the pensions of those who are elderly, infirm and out of work? 397 00:42:44,850 --> 00:42:53,490 Should you do so out of a duty to redistribute your known fortune to others who are known to be unfortunate? 398 00:42:53,490 --> 00:43:00,830 In order to eliminate the unfairnesses of life. This is the answer, the question I just posed. 399 00:43:00,830 --> 00:43:05,090 Then we'll have to rely on the capacity of the fortunate to identify with the fates of 400 00:43:05,090 --> 00:43:10,310 badly off strangers and altruistically agree to open our wallets to these strangers. And if the fortunate will not agree, 401 00:43:10,310 --> 00:43:16,370 then we'll need to find a Robin Hood who will rob from the rich against their wills to give to the poor or the state. 402 00:43:16,370 --> 00:43:24,440 We'll have to do that. But I think that we can, for the most part, conceive of the case for pensions differently. 403 00:43:24,440 --> 00:43:35,060 As a form of reciprocity involving cooperation between persons, which is to the antecedent mutual advantage of each in terms of their prospects, 404 00:43:35,060 --> 00:43:42,020 we can conceive of the transfer of wealth, a pension schemes, not as a transfer between different people, 405 00:43:42,020 --> 00:43:46,550 but rather as transfers within the possible future lives of each individual. 406 00:43:46,550 --> 00:43:53,790 As transfers from one's more fortunate, possible future selves to one's less fortunate, possible future selves. 407 00:43:53,790 --> 00:43:58,880 No, this case can be addressed to many of you in this virtual Zoome webinar, 408 00:43:58,880 --> 00:44:07,580 who are university students who have recently reached the age of majority and are near the beginning of your adult lives. 409 00:44:07,580 --> 00:44:11,420 Many of you are young, able bodied and productive. 410 00:44:11,420 --> 00:44:21,530 But barring miraculous breakthroughs in medical technology, your discovery of a fountain of youth, you will not remain young and able bodied forever. 411 00:44:21,530 --> 00:44:29,420 Some of you will tragically become seriously incapacitated during your working years as a result of illness or accident. 412 00:44:29,420 --> 00:44:36,260 For a few, the illnesses or accidents you suffer will be so serious that you won't survive in old age. 413 00:44:36,260 --> 00:44:47,370 But the great majority of you will make it into old age and reach a point when you're no longer willing or able to continue working. 414 00:44:47,370 --> 00:44:54,240 But you don't know how long you're going to live in retirement, at least at the beginning of your working lives, nor at that early stage. 415 00:44:54,240 --> 00:44:59,890 Do you know how well an investment that you might try to save up there in the next decades? 416 00:44:59,890 --> 00:45:05,610 For your retirement, welfare, from the perspective of the beginning of your working lives, 417 00:45:05,610 --> 00:45:10,720 is therefore rational for each of you to enter into living with others who also don't yet know their fates, 418 00:45:10,720 --> 00:45:17,770 that if you turn out to be amongst the unfortunate whose pensions pots would not have yielded enough for your retirement 419 00:45:17,770 --> 00:45:25,790 resources will be transferred to you from those who pet whose pensions parts would have overflowed in their retirement. 420 00:45:25,790 --> 00:45:32,840 But this arrangement will work only if we all agree to bind ourselves in advance so that if we turn out to you in the fortunate, 421 00:45:32,840 --> 00:45:38,760 we're not allowed to defect from the scheme and going and go it alone. 422 00:45:38,760 --> 00:45:49,090 So by joining together as a collective in the manner famously depicted on the front pages of Hobbs's Leviathan. 423 00:45:49,090 --> 00:45:55,850 Fatah will attend the risks that it will face as individuals, each with our own private pension pot. 424 00:45:55,850 --> 00:46:04,790 Investment and longevity risk can be pooled to the insurance of a mutual association in a manner which is to the xanthi advantage of each. 425 00:46:04,790 --> 00:46:09,730 It's rational for each of us to agree to share one other's fates by pooling risks to 426 00:46:09,730 --> 00:46:17,840 cross both space and time on fair terms of social cooperation for mutual advantage. 427 00:46:17,840 --> 00:46:19,457 Thank you all very much.