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Pensions: the basic solution
Financial Times, April 30, 2003
the problem of Britain's pensions rumbles on, ever more desperate (and
unjust) solutions to the crisis are proposed. Perhaps the best and fairest
answer is the simplest of all: an increase in the basic state pension.
Some of the
solutions have generated howls of protest among advocates for older
people, and rightly so.
Calls for raising
the age at which people can receive the state pension from 65 to 70 seem
draconian for a society as wealthy as Britain's. A large number of Britons
- possibly the majority - who have worked hard all their lives do not want
to continue working until they are 70. Working until 70 would impose
physical hardships on many older people that would seem more appropriate
to a poorer country.
For example, recent
figures from the International Labour Organisation show that in Bolivia
more than half of its citizens who are 65 or older are still working. But
does a country as rich as Britain really need to consider the same
measures as Bolivia?
Two other extreme
devices - to make occupational pensions cheaper and hence more attractive
for employers by breaking the inflation indexing of occupational pensions
and removing survivors' benefits - seem to be recipes for fear and misery.
Inflation indexing is a cornerstone of stability, and survivors' benefits
prevent large numbers of grieving older widows from being plunged abruptly
solution from the Trades Union Congress - to compel employers to offer
occupational pensions, and to compel virtually all employees, except for
the lowest-paid, to contribute - has some virtue. Compulsion forces
individuals to face the reality of their own personal pensions crisis, and
to start making a sizeable contribution to their future spending needs.
Many of the arguments against compulsion centre on the principle of
personal liberty. Why, the argument runs, should people be forced to save?
If that particular
principle is based on the tenet that people should have the freedom to do
anything they like which does not harm anyone else, then the argument
against compulsory saving fails the test. If one assumes that the
government would never allow any pensioner's income to fall below a
certain level, people who have saved would be forced, through taxes, to
provide not only for themselves but for those who had exercised their
freedom not to save. This is the situation which the chancellor Gordon
Brown's minimum income guarantee, shortly to be renamed the pensioner
credit, puts us in - by imposing an effective rate of tax on savings.
The facts make grim
reading. Recent survey evidence from Age Concern suggests that only half
of working-age Britons are saving for retirement or paying into a pension.
Those who do save are likely not to be putting away enough. Estimates of
how much people need to save to enjoy a satisfactory pension vary
enormously. They depend, for example, on views of future investment
returns and on when the individual begins to save.
But most experts
agree that workers need to save significantly more than 10 per cent of
their earnings over at least three decades, to avoid a truly debilitating
fall in living standards when they retire. Large numbers of money purchase
occupational schemes fail this test - even after allowing for employer's
and employee's contributions. Personal pension saving performs even worse
against this benchmark.
The trouble is that
there is something seriously wrong with the way many working-age Britons
view both their earning power and their future financial needs. Despite
the spectacular real-terms increase in average earnings over the past
half-century - about 250 per cent for full-time male manual manufacturing
workers since 1950, for example - the average Briton remains convinced
that he or she is financially hard-pressed.
It seems sensible
not to save for the future when one does not have enough money for today.
This view is unlikely to change, as expectations of an adequate standard
of living - once restricted to enough money to subsist but now expanded to
include overseas holidays, regular meals out and designer clothes - are
stretched even further.
occupational pensions would force people to show a little more
responsibility, but they have one essential flaw: more than 25 per cent of
the working-age population does not have an occupation. Coverage would,
therefore, be extremely patchy, particularly among women, ethnic
minorities, the disabled and those who have less in the way of other
non-pension savings to fall back on.
raising the basic state pension, on the other hand - an aspiration of
lobby groups such as Age Concern - would skirt around many of the well-
rehearsed problems posed by other solutions. Mr or Ms Thrifty would have
less cause for anger than under the present means-tested system, since
they would be receiving the same basic pension as everyone else, with no
penalty for putting away extra money for a better standard of living.
Provision would be universal, leaving no holes in the safety net. d4 The
most commonly voiced objection to this solution is its cost. But we are as
a nation becoming not poorer, but richer - and at rather a rapid rate. At
times this fact is almost erased from public consciousness by rising
expectations about standards of living, complaints by opinion-formers
about Britain's poor performance relative to other countries, and
high-profile government statistics which, in a Sisyphean manner, measure
relative rather than absolute poverty.
In recent history,
earnings have grown in real terms at an average rate of about 2 per cent a
year in the UK. Let us suppose that earnings continue to grow appreciably
every decade, and working Britons give up, in extra tax, only half of the
net earnings increase to finance the country's collective retirement
needs. In only a decade's time the pensions crisis would be on its way to
a solution - at the cost simply of a reduced rise in disposable income and
living standards for working people, rather than an outright fall. The tax
system could be structured so the poorest in society would avoid the
compulsory saving associated with the tax increase.
There is easily enough money to go round in Britain to solve the pensions crisis. One solution is for the government to end Britons' yen for spending that money by taking it away from them now and giving it back to them later.