Editorial: widened economic gaze needed

Here are two seemingly contradictory views about pensions that I keep running into: 1) pensions is pretty closed off from the outside world; and 2) you can’t understand pensions unless you understand lots about the world outside it; politics, economics, psychology, etc. This is a problem.

Permit the presumptuous newcomer an example. One axiom the industry has is that people aren’t saving enough into pensions. Auto-enrolment is routinely criticised for setting the savings target at 8 per cent.

What no one seems to be considering is the potential macroeconomic effect of high levels of saving. Were everyone to save 10 per cent of their qualifying salary tomorrow, we’d be facing a drop in aggregate demand so large it would shake the whole economy.

Okay, saving into a pension isn’t the same as saving in a jar or current account. But given pension funds are holding an ever-smaller amount of equities, a lot of money is still being transferred away from the real economy, from individuals into illiquid assets.

The drop in aggregate demand during the 2008 financial crisis was something like 6 per cent. What it would be if everyone started saving 10 per cent is difficult to say, but it would be perhaps big enough to be self-defeating.

Systemic risk and the failure of markets to price it in was at least partly the cause of the financial crisis. Food for thought.

But, I hear you protest, people need to save more or they won’t be able to afford a comfortable retirement. If we can’t figure out how to get adequate pension provision for most people from the levels of saving we’re already talking about, we need to be honest about the extent of the structural limitations we’re facing, and be ready to contemplate much more radical solutions.

Tom.Stevenson@FT.com

twitter.com/tomstevenson_