NO DECENT civilisation should condemn the majority of its people to 30 years of starvation and misery, while around them the rest of the population enjoy the wealth they created. But this will be the situation faced by pensioners in Britain if the government drives through its pensions strategy.
New Labour has tried to justify its policies by conjuring up a nightmarish image of an army of crinklies scrounging off hard working families. But in reality a relatively small proportion of Britain’s wealth goes into pensions.
According to the Organisation of Economic Co-operation and Development, Britain’s pension bill in 2000 was 4.5 percent of GDP—compared with 11.5 percent in Germany, 12.6 percent in Italy or 9.8 percent in Spain.
Nor is it true that paying more towards retirement is a “sacrifice” for the young, as if the old were a different species. When you save for your retirement, you are taking care of your own future. Everyone gets old—the only way to avoid it is to die young, in which case losing your pension contributions is the least of your worries.
The real choice facing us is whether to end a life of toil with a retreat into misery, or to strike some more humane balance.
It is true that Britain will, in future decades, have an older population. This is not because of people living longer, as is often suggested, but because the birth rate is falling. This is a global trend. According to the United Nations, the proportion of children in the world’s population fell from 45 percent to 30 percent between 1950 and 1998.
The changing demographic in Britain means that the problem is not just the size of our pension contributions, but also the size of the workforce. The simplest way to create the resources for pensions is to make sure everyone who wants to work is able to.
That means removing the many barriers that the market economy places in the way of the right to gainful employment.
Society benefits every time someone is able to join the workforce whether because of full employment and adequate child care, because racist or sexist barriers to employment are removed along with discrimination against disabled people, or because of improved access to higher education.
Nor should we forget the idle rich, another significant drain on resources. A punitive wealth tax would be a very effective measure to reduce anti-social idleness.
Instead of prioritising these measures, the government is targeting those groups of workers who are least responsible for the “pensions crisis”. The most significant change to the British pensions system is already being enacted in a series of phased measures. These will penalise early retirement by reducing benefits available to those who take it.
Why hit the people who most need benefits? As Unison and other public sector unions point out, the people most severely affected are precisely those on relatively low incomes who have given a life of service and whose work is the most physically demanding.
The argument for the government’s emphasis rests on a much more mythical foundation than the demographic case of an ageing population. It rests on the idea that, somehow, “grey people” have become a new layer of spongers, living at public expense at levels far above what society can afford. In fact the average gross income of a pensioner couple in 2003 was just £388 a week.
After housing costs, the median total earnings from all sources of a pensioner couple was £242 a week, or £122 for a single pensioner. “Median” means that half of all pensioners earn less than these amounts. These figures place well over 60 percent of pensioners below the poverty line.
At the core of the government’s drive is yet another myth—that the private sector is somehow inherently more efficient and better equipped to cope with pensions. Actually the reverse is the case.
In terms of sheer efficiency and value for money the best performer is the state pension itself—delivering annual payments up to four times greater than contributions.
In second place are occupational pension schemes, particularly in the public services where contributions of 15 percent of current income deliver a value well over 60 percent of final income. This ratio of delivery to payment is significantly greater than what can be obtained from a managed savings fund.
How can the income received from a pension be so much greater than the contributions to that pension? Because a pension uses the contributions of those who die early to pay more to those who die later.
If the average worker pays contributions for 40 years, and draws a pension for ten, then the resources exist to pay her four times the actual money she has saved.
Such a system works provided that contributions are paid throughout an individual’s working life and by succeeding generations. Otherwise, when a worker reaches pension age, there is no one left to transfer the income from.
Not surprisingly, therefore, the most successful of the occupational funds are in industries that are very stable and have lasted a very long time—most notably the state itself and its branches such as local government, health and education.
Attempts at a “mandatory” private system—the Third Way that Blair would most like to see—have so far failed because of justified public mistrust. When it comes to a guarantee of payment in 40 years’ time, people instinctively know that there is a fairly high prospect of their savings being gambled away in the stock market, lost in bankruptcy or simply stolen by the employers.
Studies have shown that private pension funds provide the worst performance—even in terms of what they deliver on the stock market. They tend to make short term, risky investments and, because of the “herd” instinct of fund managers, pension funds follow stock market bubbles and indeed go a long way towards provoking them.
Even when the market performs well, it has been estimated that the administrative cost of delivering even the most simple private pension schemes exceeds 45 percent of what the unfortunate pensioner finally receives. The “pensions crisis” thus arises not because of the “demographic time bomb” but a financial time bomb. Private sector schemes, rocked by the bursting of the stock exchange bubble and morally damaged by the pension mis-selling scandals that surrounded the government’s first foray into private funding, are in a mess.
The nature of pensions means that apart from real estate with all its attendant risk, the returns on an investment in a pension scheme are generally a better bet than what the financial markets can offer.
Capitalists are therefore desperate to enter the pensions market because otherwise they cannot attract what has become today’s largest source of liquid savings.
But these capitalists are at the same time profoundly repelled by such schemes for two reasons. First, they incorporate a principle of social right and entitlement, which means that to function properly pension schemes need to be heavily regulated, restraining the freedom to follow the profit motive.
Second, pension schemes are generally profoundly redistributive. They rest on the notion that scheme membership entitles a pensioner to a “defined benefit”—in the case of the state pension a fixed amount, in the case of the occupational scheme a definite proportion of final salary.
While a pension from a final salary scheme does depend on income and career status, it does not depend on the amount of money paid—that is, it does not depend on capital.
This places private capital in a bind. If it simply offers “normal” financial packages to the small investor, it will always lose out to pension schemes. But it cannot provide the security that goes with a state-backed or mandatory occupational scheme.
Capital always lobbies for pensions tied to wealth, for private funding which can freely speculate in financial markets, and to stop pensioners exercising any collective control over their pensions—anything that undermines the basic welfare principle of pensions, which is the universal right to a decent retirement.
The latest government proposals capitulate to this agenda and the result is a bad choice, a choice that will not work financially and, unless it is stopped, will condemn today’s generation of young workers to nothing more than a more miserable future.
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