2020 Lectures: Michael Otsuka

JOINTLY ORGANISED WITH THE MORAL PHILOSOPHY SEMINARS

Lecture 1: The case for a funded pension with a defined benefit (DB) [MP3]

I begin by drawing attention to the efficiencies in the pooling of longevity and investment risk that collective funded pension schemes provide over individual defined contribution (IDC) pension pots in guarding against your risk of living too long. I then turn to an analysis of those collective schemes that promise the following defined benefit (DB): an inflation-proof income in retirement until death, specified as a fraction of your salary earned during your career. I consider the concepts and principles within and beyond financial economics that underlie the valuation and funding of such a pension promise. I assess the merits of the 'actuarial approach' to funding an open, ongoing, enduring DB scheme at a low rate of contributions invested in 'return-seeking' equities and property. I also consider the merits of the contrasting 'financial economics approach', which calls for a higher rate of contributions set as the cost of bonds that 'match' the liabilities. I draw on the real-world case of the UK's multi-employer Universities Superannuation Scheme (USS) to adjudicate between these approaches. The objectives of the Pensions Regulator, the significance of the Pension Protection Fund, and the decision of Trinity College Cambridge to withdraw from USS to protect itself against being the 'last man standing', all figure in the discussion.

Watch on YouTube  | Slides for Lecture 1

Lecture 3: The case for an unfunded pay as you go (PAYG) pension [MP3]

The previous two lectures grappled with various challenges that funded collective pension schemes face. In the final lecture, I ask whether an unfunded 'pay as you go' (PAYG) approach might provide a solution. With PAYG, money is directly transferred from those who are currently working to pay the pensions of those who are currently retired. Rather than drawing from a pension fund consisting of a portfolio of financial assets, these pensions are paid out of the Treasury's coffers. The pension one is entitled to in retirement is often, however, a function of, even though not funded by, the pensions contributions one has made during one’s working life. I explore the extent to which a PAYG pension can be justified as a form of indirect reciprocity that cascades down generations. This contrasts with a redistributive concern to mitigate the inequality between those who are young, healthy, able-bodied, and productive and those who are elderly, infirm, and out of work. I explore claims inspired by Ken Binmore and Joseph Heath that PAYG pensions in which each generation pays the pensions of the previous generation can be justified as in mutually advantageous Nash equilibrium. I also discuss the relevance to the case for PAYG of Thomas Piketty's claim that r > g, where "r" is the rate of return on capital and "g" is the rate of growth of the economy.

Watch on YouTube  | Slides for Lecture 3

^{Oxford University Press}

How to Pool Risks Across Generations: The Case for Collective Pensions

Professor Michael Otsuka, 2020 Uehiro Lecturer

Published: 27 June 2023, Oxford University Press
ISBN: 9780198885962

How to Pool Risks across Generations makes the case for the collective provision of pensions, on fair terms of social cooperation. Through the insurance of a mutual association which extends across society and over multiple generations, we share one another's fates by pooling risks across both space and time. Resources are transferred, not simply between different people, but also within the possible future lives of each person: from one's more fortunate to one's less fortunate future selves. The book opens with an investigation of the longevity and investment risk that even a single individual on a desert island would face in providing for her old age. From this atomistic starting point, it builds up, within and across the chapters, to increasingly collective forms of pension provision. By joining together, it is possible to tame the risks we would face as individuals each with our own private pension pot. A collective pension can be justified as a 'social union of social unions': an enduring corporate body, which is formed by agreements to pool risks, in a manner that involves reciprocity between the various individuals that constitute the collective. Even though all individuals age and die, a collective pension scheme remains evergreen, as the average age of members remains relatively unchanged, through the influx of new members to replace those who retire. It is therefore possible to smooth risks indefinitely across as well as within generations, to the mutual advantage of each.

Link to the Uehiro Series in Practical Ethics on the OUP website: http://ukcatalogue.oup.com/category/academic/series/philosophy/uspe.do