Low pensions condemn people to poverty and misery. Both are becoming all too prevalent because Britain, despite being a rich country, does not pay a decent state pension.
The present state pension of £84.25 a week (£4,381 a year) for a single pensioner and £134.75 a week (£7,007 a year) for retired couples is totally inadequate. Pensioners are forced to make hard choices between food and paying high heating and transport costs.
Almost two million British pensioners live in poverty. Over half a million over 65s are undernourished and risk ill-health due to poor diet. More than 31,600 pensioners died from cold and related illnesses during 2004-5 because they could not afford to adequately heat their homes.
Around 1.4 million British pensioners – 14 percent of the total – survive on £5,000 or less a year. This averages out to just £3,000 per year, or £8.49 a day, once council tax, water and electricity bills are taken into account.
This struggle to live on £8.49 a day could affect some people for 25 years of their lives. Some 38 percent of pensioners have an income of £10,000 a year or less, and more than half of them live on £15,000 or less annually.
Many pensioners receive low pensions because they did not earn enough during their working lives to set money aside for retirement.
Even workers that did manage to save for retirement often find their savings have been stolen by the finance industry – as evidenced by scandals over pensions mis-selling, endowment mortgages, precipice bonds, split capital investment trusts etc.
So for most people, the only durable source of a pension is the state pension. Yet measured as a proportion of average post-tax salary, the British state pension is one of the lowest in the Western world.
The Organisation for Economic Cooperation and Development (OECD) has drawn up a league table of state pension provision in 30 advanced industrialised nations. Britain is ranked at number 26 – pensioners in France, Germany, Luxembourg, Austria, Hungary, Italy, Spain, Turkey, Greece, Portugal and the Czech Republic all receive better state pensions.
Successive British governments have been too afraid to upset corporations by requiring them to make adequate national insurance contributions. British employers are typically required to pay 12.8 percent of employee earnings between £97 a week (£5,044 a year) and £645 a week (£33,540 a year).
This contribution by British employers translates as approximately 9.6 percent of their labour costs, as compared to an average 15.2 percent for OECD countries and an average 17.8 percent across the European Union (EU). In many EU countries the proportion is much higher – for France, Italy, Belgium and Austria, the figures are 29.7 percent, 24.9 percent, 23.3 percent and 22.6 percent respectively.
New Labour’s failure
The government’s new Pension Bill does nothing for today’s pensioners. It offers no hope for tomorrow’s pensioners because it fails to address deep inequalities in the distribution of income and wealth.
Nor can making people work until the age of 68 solve the problems. Manual workers have a shorter life expectancy and forcing them to work until 68 can bring early death.
This is a grossly unfair situation. Company executives have been picking up wage rises of nearly 30 percent each year while ordinary workers barely keep pace with inflation – and these executives also retire early.
The gap between the highest paid and the lowest paid workers is greater than it has been for at least 50 years. Black and Asian families are disproportionately in the poorest fifth of the income distribution. The proportion of people in low incomes in absolute terms has remained roughly constant since 1979, despite average income growth of over 40 percent.
As a result, millions of people do not have the resources to generate income for old age or to make investments in retirement plans.
So we cannot hope to fund decent pensions for most people without an equitable share of income and wealth. Yet little has been done to address this. The official statistics show that the wealthiest 1 percent owned approximately 21 percent of Britain’s marketable wealth. The bottom half of the population owns only 7 percent of total wealth.
If the value of the place they live is taken out of this distribution, institutionalised inequalities become even starker. The top 1 percent of the population has got richer and now owns 34 percent of the wealth.
The top half have got richer still and own 99 percent of the wealth. The share of the poorest half has declined to just 1 percent of wealth. Some 23 percent of the adult population has wealth of less than £5,000.
Pattern of inequality
There has been little change in the pattern of inequalities and insecurity under New Labour. Statistics from April this year show that the median earnings for employees stand at £23,600 a year. Three quarters of all workers have a pre-tax annual wage of less than £29,000.
The bottom 10 percent earn less than £244 per week. Many shop, restaurant and clerical staff have an annual income close to the minimum wage. The 2006 annual accounts of fashion retailer Next show that the company made pre-tax profits of £449 million – but its employees had an average annual salary of only £10,306.
Some 150,000 workers in Britain are still being paid less than the minimum wage. Part-time employees, women, young people, mature workers and temporary workers are the most abused. None of this enables people to secure a decent pension.
Nor does the tax regime help. From April this year, individuals can put their entire salary into their pension scheme up to a limit of £215,000 a year. This does nothing for those on a low wage or unable to save for their pension. But it will enable the well-off, those who pay a marginal income tax rate of 40 percent, to claim tax relief of over £80,000.
Rich individuals can build a pension pot of £1.5 million (which will rise with future rates of inflation) and claim tax relief on their pension contribution. Since most citizens will not earn that amount during their lifetime, the reform will not help the poor to have good pensions – though fat cats will do nicely.
The tax relief on private pension contributions is around £19 billion each year. Due to income inequalities, some 55 percent of this tax relief goes to the 2.5 million higher rate taxpayers that make up the top 10 percent of taxpayers overall.
Some 13 million other workers share the remaining £9 billion. Due to lack of income, part-time workers, those on minimum wage, or those unable to enter a private pension scheme receive virtually no tax relief.
Austin Mitchell is Labour MP for Grimsby. Prem Sikka is a longstanding critical voice on accountancy issues. He has written several books and papers exposing the tax avoidance industry. They are co-authors of a new booklet Pensions Crisis: A Failure of Public Policymaking, available for £8.95 from the Association for Accountancy & Business Affairs, PO Box 5874, Basildon, Essex SS16 5FR. For more details go to www.aabaglobal.org