The triple challenges of a post-covid world
- Frances Coppola
As the vaccine is rolled out across the UK, and the threat to life from COVID-19 starts to recede, thoughts naturally turn to what happens next. How can we repair the damage caused by the pandemic? Will we ever “get back to normal”?
How short our memories are. The issues we now think the pandemic has brought upon us were already there before it struck. Indeed, we were actively discussing them. Have we so soon forgotten our agonised debates about the future of work in a digital age? The growing gulf between the haves and the have-nots, those who benefited from globalisation and those who were “left behind” by it? The anger of young people at the selfishness of their elders and a political system that favours the old at the expense of the young? And the existential fear that caused people to riot in the streets over climate change? All of this was there before the virus arrived, and will still be there after it has passed. In this respect, life will get back to normal.
Of course, we must repair the damage caused by the pandemic, as far as we can. But this must not distract us from the three fundamental challenges of our time:
- The rise of the digital economy.
- Ageing populations and the historically anomalous phenomenon of “retirement”.
- Climate change and environmental destruction.
For the first of these, pandemic restrictions have forced the pace of change. Working practices have changed, perhaps forever. People who have abandoned high streets and shopping malls in favour of online shopping may never return to them. Businesses that have had to adapt to a virtual existence may decide that they rather like it: even if travelling for holidays returns in force, travelling for business could remain a shadow of its former self, replaced by Zoom conferences. Service industries that depended on people physically working and socialising together face a grim future. And in the financial sector, banks are moving online at an ever-faster pace, while the growth of contactless trading and the threat of negative interest rates raise – once again – the question of how long physical cash will continue to exist.
Digitising finance sounds like an unalloyed good. Who would not prefer to make an instantaneous payment using a bank card or QR code on their phone, rather than carrying around piles of dirty banknotes and coins? But we should beware of the control that digital finance gives to institutions. Physical cash is an anonymous bearer instrument: once in circulation, people cannot be prevented from holding and using it. But when banks and governments control people’s access to money, the social consequences for those shunned by society could be severe. We should think hard before eliminating all means of transacting anonymously.
Providing a digital means of transacting anonymously was the early promise of cryptocurrencies like Bitcoin. Bitcoin was originally designed as cryptographically secure anonymous electronic cash. Sadly, it has veered far from its original purpose and is currently a speculative asset for investors desperately searching for yield. So far there is no widely-known alternative. But it’s early days in the cryptocurrency revolution, and they are not yet widely understood among the people who most need to use physical cash – the elderly and small businesses. So as digital money becomes ubiquitous, not only in availability but in understanding, perhaps an anonymous digital bearer instrument will emerge. Indeed, perhaps central banks should create one. After all, they create today’s anonymous bearer instruments.
The pandemic has also brought into sharp relief the scourge of inequality, and in particular, intergenerational unfairness. The rise of the digital economy disrupts working practices, encouraging the rise of an atomised “gig” economy in which workers’ protections are eroded and their wages depressed. In contrast, the pensions of those who lived and worked in an earlier, kinder age are protected. Pensioners are of course the group worst affected by the virus itself: they have died by the thousand. And better-off pensioners are suffering an income squeeze due to very low interest rates. But the principal financial cost of the pandemic has fallen on young people, just as the cost of its predecessor the Great Financial Crisis did. The millennial generation has suffered two catastrophic financial shocks since leaving school, and the younger “zoom” generation is entering the workforce in the deepest recession since the 1930s.
The phenomenon of “retirement” is taken for granted in Western economies, though it is of relatively recent origin. Older people regard it as their right to live comfortably on some combination of state and private pensions for twenty or thirty years. Few think that rising life expectancy should mean continuing to work for longer, and to be fair, many younger people – notably employers – don’t think they should do so. Particularly now, when unemployment among younger people is high and rising, it can be very hard for those approaching the generally-accepted retirement age to find work. But the returns on pension savings are at an all-time low. Those lucky enough to have defined-benefit pensions are to some extent protected from the pension income squeeze, but many of the companies and organisations that sponsor their pensions are finding it increasingly difficult to maintain them.
Despite the best efforts of government and the finance industry, it isn’t possible for today’s young people to build up the sort of pension pots they need for the comfortable retirements that today’s older people enjoy. Forced saving such as auto-enrolment, and campaigns to encourage working people to save for their retirements, may give some relief from the future pensions crisis, but at the price of continually depressed aggregate demand as people prioritise saving over consumption. When everyone is saving like crazy, the economy goes into a sustained slump. The millennial generation has suffered two catastrophic financial shocks since leaving school, and the younger “zoom” generation is entering the workforce in the deepest recession since the 1930s.
The defined-benefit pensions crisis shows that private pensions are ultimately paid by current workers in the form of eroded wages and insecure jobs. State pensions are paid by current workers in the form of higher income and payroll taxes. And defined-contribution pensions are vulnerable to interest rate changes that can leave their recipients considerably poorer than they expected. The financial industry is unable to provide the pensions that people expect, because the promises were made at a time of much higher interest rates and, frankly, a failure to recognise the implications of a rising elder population and a shrinking younger one.
The truth is that people don’t save for their own retirements, they pay during their working lives for the retirements of others. That is true whether the pension they eventually receive is a pay-as-you-go state pension or a fully-funded private one. We need a new social contract that more fairly distributes the costs and benefits of retirement, and a complete rethink of the approach to retirement provision. Pension savings should be fully deployed in building productive enterprises and activities bringing about social change, not dumped in “safe assets”. And the state should fully guarantee a decent standard of living in retirement regardless of taxes paid during working life.
We need a new social contract that more fairly distributes the costs and benefits of retirement, and a complete rethink of the approach to retirement provision.
One area that pension savings could and should be deployed into is the green economy. Old and young alike often assume that climate change and environmental destruction is a problem for young people to solve, because the old won’t be there to see its effects. But old people have children and grandchildren: even though they may not actively be involved in saving the planet, their retirement savings can provide the money to enable younger generations to do the work and be properly paid for it. The finance industry can help by redirecting retirement savings into green investments and project funding.
The ideas in this article only scratch the surface of what needs to be done. Digital transformation, the pensions crisis and climate change are not going away, but if the wealth of the old can be productively deployed to enable the young to bring their brains and their creativity to bear on these triple challenges, we may yet secure the future of today’s young people and those yet to be born.
To read the full 'Banking on building back better' joint essay series with the Social Market Foundation, click here.