Pensions policy: same old story
For all the bluster over pensions, both the Tories and Labour agree that the real problem is too many elderly people.
Tory leader Michael Howard’s announcement of a pension policy yesterday was greeted by many as a smart move. The Tories argue that Labour’s policy on pensions is a mess, and propose instead increasing tax relief for pension contributions and temporarily re-indexing state pensions to earnings.
Yet there is little real debate about pensions going on. On side we have Tory ministers fearmongering over a ‘pensions timebomb’, and on the other side Labour ministers who would prefer to not talk about it. Yet both sides come from the same, problematic starting point: they argue that the real problem when it comes to pensions is rising numbers of elderly people and the ticking ‘demographic timebomb’.
The official Labour position is that we should wait and see what Adair Turner proposes in the final report of the review being conducted by the government-appointed Pensions Commission, due to publish in the autumn. Even after that, Labour wants more debate and consultation, possibly running until the next General Election and perhaps not resulting in any firm proposals until a fourth Labour term.
Meanwhile, the public pension problems of meanness, iniquity and complexity all continue. It is difficult to argue with the assessment made in the Financial Times that pensions policy ‘has been one of the great failures of Labour policy during its eight-year tenure…. If the election were to be decided on pensions alone, Labour would have a hard time arguing its case.’ (1)
Leaving aside yet another example of the Labour government’s abdication of political responsibility and leadership, is the Tory proposal a good one in pensions policy terms? Does it warrant the sort of positive editorial endorsement given by the Daily Telegraph and others: ‘The pensions crisis: a step in the right direction’? (2) The quick answers are: no and no.
The Tory call to ‘face up to this pensions time bomb’ is not a step in the right direction. By discussing the issue in such alarmist terms it reinforces the already ubiquitous concerns about the long-term problems of an ageing population. Ageing is supposedly a huge social challenge, with too many old people representing a substantial burden that threatens future prosperity. For as long as such worries remain dominant, we will not see the implementation of the sort of bold measures needed to bring about a decent pensions system. The core problem with the Tory suggestions is that by pandering to the idea of a mounting crisis of longevity they only reinforce the existing consensus that there are huge difficulties ahead.
The biggest problem getting in the way of progressive pensions policies – and this also applies to the USA and much of continental Europe – is the paralysing conflation of two separate issues. First, there is the failure of the current pension system, the product of a quarter-century of successive government policies designed to limit state responsibility for social provision for the elderly. Second there is the widespread presumption that, over the longer term, ageing makes decent pensions unaffordable, as the ageing time bomb ticks away ever more loudly.
The first set are genuine problems, causing hardship and understandable personal anxieties; the second is imaginary, a symptom of our culture of fear, uncertainty and trepidation about the future. Unfortunately the presumptions underlying the second mythical problem are used to block sorting out the first real set of problems. The rhetorical answer to every sensible suggestion is: ‘Hold on, surely we can’t afford this over the long run?’, followed instead by the perpetuation, if not aggravation, of today’s tribulations.
Instead, the immediate starting point for any progressive pensions policy should be to raise the basic state pension to a minimum of the current limit for means-tested benefits of £109 a week, and then restore the earnings link. This increased payment would be available to all, a genuinely universal entitlement thereby removing the current penalisation of many women and carers.
The first year cost of such a change is estimated at about £7 billion, which in an economy with an annual output of well over £1,000 billion is a little over ½ per cent of GDP. With figures being bandied about as to whether public spending might rise by 2 or 4 per cent of GDP over the next few years, this is a relatively small amount to bring significant benefit to millions of people today. There is not even financial need for the cautious approach being suggested by the Liberal Democrats – who broadly endorse this reform – of only phasing it in gradually starting with the over-75s.
A second problem with the Tory proposals is that they take as given the existence of a ‘savings gap’, that we are not saving enough to prepare for our longer lives. The stated objective in raising tax relief is to ensure that people, especially those on average and low incomes, save more. Leave aside their uncertain arithmetic, the injunction that we need to save more, with its moralistic subtext that we are blithely and irresponsibly spending too much, turns the economics of ageing on its head. In short, it focuses on savings rather than the logically prior investment.
The most important factor determining future prosperity is not our demographic condition but the productivity growth we can achieve. Quality productive investment is the precondition for robust productivity, and it is a fallacy that higher personal pensions savings will automatically lead to this stronger productive investment and the higher output from which future pensions can be paid. And if the economy were to fail to grow, future pensioners would have financial difficulties however much they had saved in pension funds.
Investment in the UK and elsewhere in the developed world has been quite weak in recent years, but this is not the result of a putative shortage of savings. In fact, by some measures there is an excess of savings on a global scale. It is narrow-minded to think that additional pension savings would help when other significant non-financial factors are holding back businesses and governments from investing enough to generate more wealth. These days, a mood of caution in business, a heightened aversion to risk, the constraints of over-regulation, and a proneness to short-termism are all much bigger barriers to innovation and sustained investment than any problem of finding the funds for it. For those concerned about society having enough resources to give everyone a prosperous future, these are the issues that need to be addressed.
It is appropriate for politicians to think about what might produce greater social wealth – it would be better if more of them did, rather than target ‘over-consumption’ and environmental ‘limits’. But the answer is not higher personal savings. Highlighting pensions savings – and the Tories aren’t unusual in this aspect of their policy, either – reinforces the notion that retirement and an ageing society are matters of individual rather than collective responsibility, and also distracts from removing existing social, institutional and cultural barriers to faster economic growth.
Politicians should emphasise the importance of promoting stronger economic development as the best means to ensure that older populations can be better off. They should trust people to manage their own finances and not impose by compulsion or exhortation a pensions savings imperative that can be inappropriate, even harmful, to many people. For example, young and lower-income people often have better uses for their income than pension savings, and could even be worse off over their lifetime if they did commit more to private pensions.
The Tories have now added pensions to the long list of election issues around which they are seeking to play on popular fears. They are sufficiently on the ball to recognise the susceptibility for this in the area of ageing and pensions, but their intervention doesn’t do anything significant to deal even with those immediate issues outlined earlier.
The challenge for progressives is to stand up and argue against the fiction of an ageing time bomb. The Tories instead are pandering to and exacerbating fears of such an ageing crisis. But this myth is the biggest bloc to addressing the genuine problems facing an ageing society. None of these problems is caused by demography itself, but are the legacy of past and current mean-minded and harmful decisions and practices, which these Tory plans show no signs of reversing.
Ageing: the future is affordable, by Phil Mullan
(1) Norma Cohen, ‘PPF doesn’t mitigate Labour’s failures’, FTfm, 18 April 2005
(2) The pensions crisis: a step in the right direction, Daily Telegraph, 18 April 2005
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