Thursday, 1 December 2011

The sustainability of pensions

Pensions are a big issue at the moment. Perhaps I should have posted this on wednesday, the day of the public sector pensions strikes but then you would have thought I was talking politics. This post is not political - honest! What I want to explain very simply is the link between pensions, populations and economic growth.

Imagine first that we had a totally steady state economy, with no inflation and no economic growth. The average life expectancy at the moment for those reaching retirement at 65 is 85 for women and 82 for men [1]. This is increasing all the time with better health care. If you are a man, retiring at 65 after 45 years working, then you can expect another 17 years in retirement. To make the numbers easy, suppose you want a pension which is 2/3 your average salary (average over your whole working life). Then each year of work you would need to pay in 2/3*17/45 = 25% of your salary in to a pension. No-one does that now because we rely on economic growth to ensure that the money we pay in during our working life is worth more by the time we retire. At 3% growth, money invested for 20 years will have increased in value by 81%. Money invested for 40 years will have increased by 226%. This is why we are encouraged to start our pensions early.

However, in the current world, economic growth requires increasing energy and use of resources. Even though our energy use is getting more efficient it does not keep up with our increase in production. Energy is less of a limit than resources because the sun provides us with new energy all the time. Still, ultimately this growth is unsustainable. The blog 'Do the Math' on Galactic scale energy [2] shows us that if we consume 2.3% more energy each year then in 275 years we will be consuming 20% of all the solar energy incident on the planet's land surface. In 400 years we would be consuming 100% of the solar energy incident on the entire planet. In 1350 years we would be consuming all the energy given out by the sun (we would have to completely surround it with energy collectors).

Instead of economic growth, we might rely on our children. If we had a steady state population, all working for 45 years and then retiring for 17, then for every 45 working men there would be 17 retirees and 20 children to support, so we would be supporting nearly a whole extra person throughout our working life. We can of course spread the load by having more children, but then to keep them in the lifestyle we are accustomed to we need economic growth.

Its a hard problem and it needs a radical solution. The easiest one that I can see is a more gradual retirement. I don't want to do nothing for 20 years at the end of my life, but I shall certainly want to ease up a bit (and maybe have more time for writing this blog).

[1] Topic guide to: Life Expectancies (from
[2] Do the Math - Galactic Scale Energy

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