Let's have some blue skies thinking over how to solve the pensions crisis

I would suggest no income tax at all on earning over the age of 75. Suddenly the world would be full of vigorous octogenarians

So there is a £35bn "black hole" in our pension provision. Instead of putting £86bn into private pensions last year, we may only have been putting aside about £50bn.

The good news is that at least we now know about it. The bad news is that even if we were putting aside the £86bn it would not be nearly enough – for under-saving is only half the problem.

Pensions face a WorldCom problem and an Enron problem – those two catastrophes of American finance are neatly mirrored in our own pension accounting.

The WorldCom problem was counting as new investment money that had been spent on current expenses. That is a bit like the new black hole: it seems that a lot of the money the Government thought was new investment in pensions was actually people moving their pension from one pension company to another. In both cases real investment was lower than thought. In the case of WorldCom it meant the company was losing money instead of making it; in the case of our pensions it means the pot of savings available to fund retirement will be smaller than was first thought.

Of course there are differences: one was, according the company, a fraudulent conspiracy; the other evidently a statistical cock-up. But sadly both undermine confidence in investment numbers. If you are to save now – forgoing consumption – in order to be able to have a higher standard of living in 30 or 40 years' time, you have to be able to trust both that those savings will be secure and that the pot of savings will be sufficient for your needs. Companies that lie and governments that miscalculate undermine that trust. One human temptation is to cut saving and go and have a holiday instead.

Human but dangerous, because people who do not save are implicitly relying on others to pay for them when they can no longer support themselves. Others? What about National Insurance? We pay this huge amount each year in return for a pension when we retire. Surely that constitutes some form of saving? Would that it did. If private sector pensions have to face the WorldCom charge that investment is lower than cited, public sector ones have to face the Enron charge.

There, you may recall, debts for which Enron was liable were not shown on the company's balance sheet. National Insurance liabilities are not shown on our Government's balance sheet – or indeed on other governments' – even though it is responsible for public pensions. Instead, the fundamental weakness of a pension system where each generation pays for the previous generation's pension is ignored. You don't need to be a whiz at maths to figure out that a system designed when there were five workers for every pensioner does not work when there will be fewer than two workers for every pensioner, as there will when the present thirtysomethings retire. When they do – and find they have paid in vastly more in National Insurance Contributions than they will receive in pensions and other services – they will have a right to feel defrauded.

So what's to be done?

Well nothing at all can be done until both the private and the public sector produce honest figures. The private sector pensions industry will have to acknowledge the huge uncertainties under which it operates and base projections on a cautious estimate of the returns it can achieve.

For example it should not assume that the real return on savings will be higher than about 6 per cent. In fact that is probably pushing it. Shares have yielded an average 6.4 per cent in real terms over the past 130 years (nice long period, that) but government bonds and cash only 1.7 and 1.8 per cent. Because shares move up and down so much some portion of savings have to go into other investments, so maybe a 5 per cent or even a 4 per cent assumption is safer.

The pensions industry also has to be frank about the way its own costs cut the benefits available. It needs to cost in any other inducements or guarantees it offers – the crucial error of Equitable Life. If the results show that pensions do not look as good a deal as the industry would like, well, at least we would know where we stand.

Government needs to be more honest too. It needs to be more honest about the impact of its policies on the private sector. When Gordon Brown brought in an additional tax on pension funds he failed to give an estimate of the reduction in pensions that would result. It should estimate the reduction in pensions that results from the cost of additional regulation. (That is not to say that regulation is bad; simply that it adds to cost and hence cuts the amount that can be invested on behalf of the pensioner.)

Most important, though, Government needs to be honest about the National Insurance black hole: how little people will receive in relation to earnings under present rates of contribution and how much more NICs might have to rise under different assumptions. This is in a sense bad news: the deal is worse than governments have pretended. But at least we would know where we stand.

Once there are honest figures then there can be a sensible debate about what is to be done. That ought to be outside politics. We are talking about what will happen to people in 2020 to 2050 and beyond. The yah-boo point-scoring of politicians over this is both silly and destructive. There is a host of ways of coping with what in any sensible terms is something wonderful – people living longer – but we won't find them unless we acknowledge that this is not a party political issue.

And those ways of coping? They fall into two groups: encouraging people to save more and encouraging them to work longer. Up to now most of the discussion has been about the first and that will be part of the solution. But I'd like to see more ideas on the second.

Here are three. The first two are not original; they come from a friend who is a very senior adviser to the Government in other areas.

One is to offer people a higher level of state pension depending on when they retire. So if you chose to retire at, say, 75, you would get double the normal pension.

The second would be to end National Insurance Contributions for people who work beyond normal retirement age. They have, after all, paid their full wack over their lifetime. Why should they pay more now? That would both increase the supply of people wanting to work and cut the cost to the employer.

I would add a third: no income tax at all on any earnings over the age of 75. Suddenly the world would be full of vigorous octogenarians actually allowed to keep all the money they earn. It is ludicrous they should have to pay tax on it at that age. Much more sensible (and less patronising) than giving them free television licences. Given the growing proportion of the 80-pluses on the electoral role, it might be a material vote winner too. Particularly in Eastbourne.