@ galamcennalath

@ galamcennalath

I do not think you are correct in saying that the Norwegian fund is nothing to do with the oil fund - see this wiki article

http://en.wikipedia.org/wiki/The_Governmen..._Fund_of_Norway

and this from the norwegian government

www.regjeringen.no/en/dep/fin/Selec....html?id=697027

Large state revenues from the petroleum activities have resulted in substantial financial assets in the GPFG. The Fund was established in 1990 as a fiscal policy tool to underpin long-term considerations in the phasing in of petroleum revenues into the Norwegian economy. Long-term, sound management of the Fund helps to ensure that both present and future generations can benefit from Norway’s petroleum wealth.

The GPFG is an instrument for general saving and does not have clearly defined future liabilities. Fund capital is not earmarket for pensions or other specific purposes

But the real question is why you believe a pension fund is superior to a pay as you go system. The Norwegians had a particular problem of enormous oil revenue which, if released directly into the economy, would have potentially destabilised the krone.Thus the oil fund subsequently renamed the pension fund but not hypothecated as the NIF is.

A fund is a benefit for a country in terms of domestic inflation and foreign exchange rates etc: but there is no reason to presume it is a good idea for state pensions: or, rather, there are arguments both ways

A pay as you go system has these advantages: it means that (assuming the political will is there, as ever) pensioners will enjoy the same benefits as everyone else in terms of uprating in line with inflation or with wages. In a funded scheme that is by no means certain for this reason: the fund must be invested and therefore the returns are risky.

There is a further problem with a funded scheme. They are long term and there is always some level of inflation: indeed it is pretty much a disaster if there is not, despite what we are normally asked to believe. But consider this:

Say the average wage in 1970 was £30 per week and that it is £475 now. If we assume that the amount required to meet current expenditure is 80% in both cases (not very realistic as it is far too high, but it serves) then a very prudent person in 1970 could save £6 per week. £312 per year. If all else remains equal (which it doesn't but let that pass), and assuming interest at an average of 2% on savings throughout, and inflation at 7.34%, then total savings over a lifetime of work are £88,139. If you change the interest/return to 5% it results in savings of £139,424. It bears no relation at all to what is need to keep you in old age: and it cannot. What it means in practice is that if you live 15 years after retirement you can spend 15% of average income each year on the 2% assumption: and about 30% on the 5% assumption. Which is poverty by anybody's standards.

The actual amount you can save in the early years cannot increase enough because, whatever inflation does, interest rates and returns on savings are not high enough over the whole period, and saved wealth is taxed by inflation. The rate of interest/return can vary and be higher than that: but the fact is that low levels of saving get low returns. I used 20% savings because that is close to the level of income tax in this country: so that is the amount one can reasonably expect if that tax is reduced by 20%, as neoliberals propose.

There are other scenarios but I do not think this one implausible. And that is why the surface plausibility of saving directly for old age is not necessarily superior to pay as you go. The reason we are told that it is is because there is a great deal of profit to be made by private management of pension funds. They are not necessarily a good basis for a state pension, even in principle.