Down With Actuaries
BY JOHN VAIZEY ACTUARIES have a high status in modern life. Most normal people hate mathematics and are terrified of sums so they always believe in actuaries and try to do what they say in case something nasty happens. Miss Horsbrugh did this (she's pretty ordinary and normal) and look what happened to her; the same reaction landed Sir David Eccles with a bill for £31 million. The recent controversy on te*chers' superannuation is therefore a very good example to take of what happens to ordinary people when actuaries get hold of them.
Until 1918 teachers were employed at salaries and in condi- tions entirely in the control of schools and local authorities. In 1846 the central government had taken powers to super- annuate a few elderly teachers, and in the following years it occasionally did so in the interests of humanity or efficiency. After 1870, with the enormous expansion of education that took place in the last quarter of the nineteenth century, the Government from time to time found itself worried by the lack of recruits to the profession, and by the low standards of teaching that resulted from the continued employment of teachers who had inadequate savings on which to retire. In 1898, therefore, the Elementary Teachers (Superannuation) Act was passed, establishing a superannuation fund into which teachers paid contributions unrelated to earnings, and to which the Exchequer made a small annual grant. This device was the only means, that is the only one directly possible to the Government apart from inspection, towards raising the status of teaching and guaranteeing the teachers' futures. In 1912 improvements were made in these superannuation conditions and all seemed set fair for gradual improvement over the years.
During the 1914 War, teachers' salaries remained almost fixed while prices rose quickly. By 1918 teachers were very hard up and extremely dissatisfied. At the same time Parlia- ment passed the Fisher Act, promising an educational mil- lennium that would require many more and much better teachers than ever before. The situation was urgent, so the President of the Board of Education, H. A. L. Fisher, did two things. He asked Lord Burnham to be chairman of a committee to establish national scales of salariei and at the same time he introduced a bill establishing non-contributory superannuation on civil service lines for teachers. The scheme it replaced gave a fixed payment, while the new system gave benefits related to the salaries earned before retirement. This represented a very substantial gain to retiring teachers. Fisher used the device to improve conditions because it was the only one directly within his competence giving quick results in inducing recruits to join the teaching force. Local autonomy meant that salaries and conditions were only with difficulty improved, and never rapidly.
By 1920 a near-revolution had occurred in conditions of employment. The great majority of teachers had received the new Burnham awards, in many cases raising their salaries by two or three times. As a result, however, the cost of non- contributory pensions soared because they were related to the (maximum) salaries, earned before retirement. The end of the post-war boom revealed a situation created by the euphoria of the war and the reconstruction inflation that looked extremely different from what had been expected even by the most optimistic. SaIhries were high, and so were the non-contribu- tory superannuation payments in particular; they were now worth, for example, a 60 per cent. addition to the salary of an uncertificated woman teacher of fifty. In all, the cost of educa- tion to the Exchequer rose by over 40 per cent. in the three years from 1919-20 to 1921-22, mainly because of salary and superannuation payments. At the same time a depression arrived; unemployment rose and profits and prices fell. Con- sequently the teachers grew richer and richer while many other people grew poorer and poorer. • The Geddes Committee objected strongly to this situation. They were shocked by the actual cost of education and they were horrified at its prospective cost, especially superannua- tion, because the number of the retired teachers living on the new high salary scales would increase rapidly for as long as could be imagined. They recommended an immediate cut in teachers' salaries of 5 per cent. to offset the present cost, and a full investigation of the possibility of establishing a viable contributory scheme to meet the prospective cost.
The Emmott Committee was set up to do this. They found that the existing retirement conditions could be maintained by a contribution of 10 per cent. of salary. This was to be divided equally between the local authorities and the teachers, thus taking the burden off the Exchequer entirely. In 1925 this system became the law of the land. There was no genuine fund, but the pretence of one with a notional accounting system kept in order by the Government Actuary who had to submit periodic reports to Parliament. In this way financial probity was guaranteed and the 'fund' was safe from raiding by hard-up Chancellors.
Viewed in this post-Keynesian age the Emmott Committee's reasoning is seen to be wrong. Transferring the cost of super- annuation from the Exchequer to the local authorities merely transferred the burden of taxation from one class of taxpayer to another and did not reduce it at all. In that depressed age, too, the reduction in expenditure caused by the 5 per cent. levy on teachers added to the deflation, which was the exact opposite of what was needed. The levy on teachers yielded about £2 million a year less than payments out to the retired; without the levy the deflationary tendencies would have been offset by over £2 Million a year additional expenditure by local authorities and the Government. Finally, Parliament's omnicompetence cannot be limited by a notional fund, so that its establishment in no sense guaranteed retired teachers' incomes.
In 1935 the Government Actuary published his first report on the arrangements. He valued the fund as though it were a real entity consisting of good government securities yielding 31 per cent. All future payments in and out were valued as though they were capital payments so that any error was multiplied by nearly thirty times. Therefore a big deficit was found which was due to two small factors. The first was a cut in salaries from 1931 to 1934 which reduced contributions. The second was a lower death-rate than had been expected. These two miscalculations were most significant because they indicated two of the unlikely assumptions on which the actuarial calculations were made—slowly changing mortality rates and constant salary scales. Now the purpose of the fund was to control expenditure for decades into the future. Mortality rates are, perhaps, reasonably predictable, although the Government Actuary has had, in practice, continually to alter his predictions. Salary scales are less predictable, except that in a deflation they are likely to fall and in times of expanding output and reasonable prosperity (that is, times that we hope are 'normal') they are likely to rise. The Government Actuary made no allowance at all for this. What was certain was that his predictions would be wrong.
There can be little surprise, then, that the war and the subse- quent peace-time inflation made the fund go into tremendous deficit. Mortality rates fell and salaries rose rapidly. On top of this, the number of teachers increased significantly and cumu- latively, and it appears that another of the Government Actuary's assumptions was that the number of teachers would never change. Inevitably only coincidence could ever have made the accounts balance. In fact,, reporting in 1951 on the outcome of the accounting up to 1948, the Actuary found a deficit of £102 millions, and recommended an immediate increase of contributions to 6 per cent. each by teachers and local authorities. Miss Horsbrugh accepted his reasoning. The result for her was loss of office, and Sir David Eccles has finally won an increased yield of about £2 million a year from the teachers at the cost of a £31 million wage award which was granted largely because of the furore caused by the 1 per cent. increase in superannuation contributions.
Now the Actuary's assumptions have self-evidently been wrong and the result of taking his advice has been extremely expensive. Why was it so? In order to see the truth of the matter we need to re-examine first principles in super- annuation. The objective of the superannuation system is to give adequate pensions under stated conditions to retiring teachers. In some way, therefore, these payments should be insulated from changes in the price level. This is not done by the fund. The payments to the retired, like payments to the serving teachers, come out of current resources because the funds are entirely notional and represent no real assets. There is no reason why they should. The Government and local authorities, unlike a private firm, can never go bankrupt because they have taxing powers. The paraphernalia of the fund, then, obscures the true economic situation because it is made to appear that payments out depend upon past pay- ments in, which is just not the case. The assumptions on which the Actuary works, too, are static, because if he predicts change in policy this appears to commit the Government. As a result he cannot allow for growth in the numbers of teachers or in their salaries. Consequently, thirty *years ahead, to the Actuary, ruin always faces the nation because he expects more pensioners but forgets that the nation will be richer. There is no need for the Actuary's assumptions to be unrealistic at all. It is known that many more teachers will be recruited over the next thirty years, and that we shall all most probably be at least 50 per cent. better off.
In these circumstances it might be an advantage to the community, both in economy of administration and for the sake of clarity of thought, if next time the teachers are due for a pay increase the Minister suggests abolishing the con- tributory system for superannuation. This would benefit local authorities by eliminating the 6 per cent. payments (and education is now the greatest charge on their revenues), and their sole tax, the rates, is becoming politically more difficult to collect. The only objection to an offer of this kind to the teachers would be that it would diminish savings. But a fixed percentage reduction of salaries is in no proper sense saving because there is no conscious decision to abstain from con- sumption. The economics of a non-contributory scheme would be exactly the same as a 6 per cent. rise in salaries. Out of this increase savings would take place. In present circumstances a rise in salaries of 6 per cent. looks moderate. Meanwhile the Government Actuary can go away and do some sensible thinking about what assumptions to make about the futtire. He needs to.
Previous page
