Robin Blackburn: Happy retirement

We must act now to build up a social fund so we can pay the pensions of the future.

Damien Hirst's famous pickled shark is entitled The Impossibility of Death in the Mind of the Living. Perhaps a butterfly case could represent another thought: The Impossibility of Old Age in the Mind of the Young (and Not So Young). We are living through a remarkable transformation of the human condition as the average lifespan lengthens and the birthrate drops. Those who address this revolution at all usually pigeonhole it as either a bad news story - "the population bomb", and so forth - or a good news story, complete with super-grannies and athletic pensioners.

In fact, whether it is good or bad news has yet to be decided. At the moment it is simply a tremendous challenge to our culture and society, demanding imagination and forethought. In particular, the implications of these developments for a modern economy have yet to be properly worked out. Central to them is the financing of pension regimes and systems of social security. The provision of pensions seems to be about distributing wealth, not creating it. But the financing of retirement income is related to the central dynamic of the economy. A good pension regime could help reinforce a healthy and sustainable economy; a bad and short-sighted one will compound economic dangers.

A pity, then, that this government's pensions policy is, like its predecessor's, so deeply flawed. The basic approach pursued by the erstwhile pensions minister, Alistair Darling, was an extension of Margaret Thatcher's strategy of "implicit privatisation", namely allowing the relative value of the public pension to dwindle in order to induce people to seek a private provider. Now a New Labour thinktank, the Institute for Public Policy Research, tells us that this was wrong and the basic pension should be strengthened, just as Jack Jones and Barbara Castle always insisted.

The root problem of New Labour's pension policy was its boundless confidence in the financial services industry. It embraced a "Partnership for Pensions" with the private providers just at the moment the stock market was in the throes of one of the biggest-ever bubbles. Those who took out a "stakeholder pension" were obliged not only to buy shares but to do so in passively managed funds where the losses would be heaviest. With shares in Marconi and BT in freefall, and even Vodafone shrinking overnight, it was good news that take-up of the stakeholder was modest.

Meanwhile, other private and occupational provision was hit by falling stocks, increased taxes and the introduction of new accounting standards. Several employers who still offered good "defined benefit" schemes announced that they would be closed. In the mad pursuit of "shareholder value" in the 1990s, many boards used up their asset base and skipped contributions to their pension funds. After closure, employees have to fend for themselves. To add further gloom, annuity rates have halved and rumours are abroad that several of the insurers who supply private pensions are close to the sort of debacle seen at Equitable Life.

None of this would have surprised the last century's most notable welfare expert, Richard Titmuss. Not only did he warn that so long as benefits are only for the poor they will be poor benefits, but he also helped Labour draft a bold pension policy in 1957 which dryly observed: "Confidence can be placed in the survival in perpetuity of a government in Britain while similar confidence cannot be placed in the survival of any individual firm."

Since no one can deny the mess we are in, the important task is to devise alternatives. Gordon Brown has shown that, notwithstanding a hostile press, a majority will support raising National Insurance to help rescue public services. With comparatively little effort, the basic pension could be raised in line with earnings and surviving pensioner poverty eradicated. The real problem is not today's pensions but rather, in an ageing society, being able to pay pensions in 30 years' time when the number of retired is likely to have doubled, and doing so in ways that check, rather than feed, the fickle financial services industry.

Richard Titmuss believed in pre-funding pensions and doing so in ways that put resources in the hands of publicly controlled social funds, not the brokers of the "irresponsible society". There should be, he believed, secondary pensions for all, on top of a decent basic pension. Barbara Castle's Serps scheme was a result of this thinking, though it was not allowed to build up a big fund. Notwithstanding the best efforts of Thatcher and Darling, a reduced Serps still exists. If its original conditions were restored, and resources found to pre-fund it, then it could help to plug today's yawning gaps in coverage. It would even make sense to salvage Darling's one good idea - the second state pension - and integrate it with Serps so that carers and the unemployed were covered.

Gordon Brown has enunciated the so-called "golden rule" that government should borrow only to spend on capital projects, not to meet current expenditures. This could be supplemented by a "silver rule" that tomorrow's pension obligations should be met not by pledging current taxes, but by a levy of assets held to yield future income.

Thus the chancellor could require companies to issue new shares equivalent to 10% of profits each year and donate them to a national pensions fund. Such a levy would at a stroke restore the employers' contribution. However it would do so in a way that, unlike an equivalent increase in corporation tax, would not make demands on cash flow or raise the cost of employment. The pension board could pledge not to sell the shares it receives but rather hold them to yield future income.

The device of the share levy works very much like the share options which boards have been showering like confetti on chief executives. Between 1983 and 1991 the Swedish government used a social fund share levy devised by Rudolf Meidner, chief economist to the trade union federation, and it raised impressive sums.

The national pension fund could distribute resources among an independent and accountable network of regional and industrial funds, ploughing back dividend income in a socially responsible way. It could guarantee existing occupational schemes so long as they offered representation to policy holders and abided by a responsible funding formula.

So long as public pensions are run by Whitehall they will be vulnerable. We need a body at least as independent as the US social security administration, with its own staff, economists and actuaries. Of course US social security is also under threat of privatisation but this has provoked many of the country's leading economists and pension experts - notably Joseph Stiglitz and Alicia Munnell - to mount an impressive defence of both pre-funding and public provision. It turns out that the Titmuss approach is bang up to date and that Tony Blair should have been poring over Labour's 50s pensions document. This eloquent and incisive booklet had to be reprinted five times in two years, something that we will be spared in the case of New Labour's leaden, instantly obsolete Partnership for Pensions.

· Robin Blackburn is professor of sociology at the University of Essex and author of Banking on Death: the History and Future of Pensions, published by Verso.