EMPEROR AUGUSTUS came to power with the help of a private army. So he was understandably keen to ensure the loyalty of his soldiers to the Roman state. His bright idea was to offer a pension for those in the army who had served for 16 years (later 20), equivalent in cash or land to 12 times their annual salary. As Mary Beard, a classical historian, explains in her history of Rome, “SPQR”, the promise was enormously expensive. All told, military wages and pensions absorbed half of all Rome’s tax revenues.
The emperor would not be the last to underestimate the burden of providing retirement benefits. Around the world a funding crisis for pension schemes is coming to the boil. Rahm Emanuel, Chicago’s mayor, is struggling to rescue the city’s pension plans; the municipal scheme is scheduled to run out of money within ten years. In Britain the pension problems of BHS scuppered attempts to save the high-street retailer; the same issue is complicating a rescue of Tata Steel’s British operations.
The roots of the predicament lie in defined-benefit (DB) pensions, which guarantee a pension linked to workers’ salaries. These may provide security for the retired but have been expensive for employers. In many cases, DB pensions were offered decades ago when they seemed like a cheap alternative to awarding pay rises. Private-sector employers now usually offer new workers defined contribution (DC) schemes, which hand them a pot of money on retirement with no promise of the income it will generate. In time, this will create its own huge problems as workers face an impecunious retirement.
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