Britain’s National Association of Pension Funds wants a Citizen’s Pension (the report is here). Every UK resident over State Pension Age should get £105 a week from the State. Linked to average earnings, it would provide “adequacy, simplicity, inclusion, encouragement to save, efficiency, and certainty”. That’s really going some. Let’s start with “certainty”.
How would a Citizen’s Pension provide certainty? Nothing was going to be more certain than the post-war State Pension. In 1945 both the major parties endorsed Beveridge’s view that the new State Pension had to be worth more than means-tested benefits. For a while it was, but it has been declining relative to earnings for thirty years and is far below its 1950 level. Gordon Brown’s legacy, after a pledge to eliminate means-testing for the elderly, is that 60% are on means testing, higher than ever before. Today’s government also scrapped part of the Basic State Widows Pension. And of course Gordon Brown robbed private schemes of £5 billion a year. . Successive governments have broken swathes of pension promises and the likelihood is that it will get worse.
In 1950 government spending, despite a huge increase in the previous decade, was a far lower proportion of National Income than today, with pensions now only one of many enormous claims on the public purse. Spending today is higher than in the late seventies when the UK was forced into cutbacks by the IMF, one consequence being the removal of the earnings link on State pensions. The IMF is pressing the UK again now. Broken promises are the history of State Pensions. The NAPF is guilty of mis-selling. Adequacy? Adequate for what, at about a fifth of the average wage? Simplicity? Inclusion? Certainly, compared to the current morass. So would be a universal Citizen’s Wage. So would be no State Pension at all.
Efficient? Before looking at that and the biggest assertion of all, encouragement to save, let’s consider two other features of the NAPF proposal. Firstly its main comparisons are with the current system, which is not only broken but very recent in origin and thus not the only alternative in town. Gordon Brown has already somersaulted on his earlier plans with his new Minimum Income Guarantee (the derivation of the £105 per week) and Pension Credit. Secondly, the Report includes a “who wins and who loses?” analysis, the chief feature of which is that there are no losers! Naturally there must be some weasel words here – a good example being “in the sense that”. Thus the Citizen’s Pension will be good for Taxpayers “in the sense that the administration costs of the pension system will be reduced”.
Ah, the taxpayers, the forgotten taxpayers, who now include with a vengeance poor people, not least poor pensioners. Hardly surprising, since “efficient” now means “cheap to run”. Never mind the tax. The State Pension is “efficient” because costs are low in relation to turnover. But much of the turnover consists of robbing Peter to pay Paul, both of whom are in similar circumstances, so the statistic itself is cheap indeed. In fact, it’s far worse than that.
As I pointed out in my article in The Times of 9th June 2003, tax-and-spend is a negative-sum-game, and heavily so. The major reason is that since all tax is levied on exchanges it reduces, and often negates, the value of those exchanges so that they do not take place. (Tax is the internal equivalent of tariffs.) For reasons explained in that article if the UK’s total tax rate (all taxes) of 50% became 30%, the additional net value of the exchanges and trade unleashed would be sufficient to add about a third to average take-home pay (and additional future growth), after paying for the government services withdrawn to make the tax cut. The State Pension already represents over a quarter of this gap. The proposed Citizen’s pension, naturally described as “affordable” and within the current State pension’s “funnel of doubt” (all on the upside of course), is projected to rise by nearly 60% in real terms within fifty years, equating to an income tax rate of approaching 20p in the pound!
To return to the NAPF’s list of benefits, in what way is any universal benefit “efficient” except as a means of government and bureaucratic rake-off on the way through? After all, the objective of the Welfare State is to help the poor, not churn money around. And surely, as maybe even Gordon Brown has discovered, you can’t help the poor if you can’t find them. In a Welfare State (which displaces the voluntary sector), that leads straight to means tested benefits, like it or not. Not the absurd plethora of means-tested benefits and poverty-traps we have today. Surely one of those bright wallahs in the Treasury can devise a few simple tests along with some sensible tapering to avoid the worst traps. Not perfect; some disincentives are inevitable. But they are the proverbial motes in the eye compared to the beams of universal State Benefit. Here lie serious disincentives; it is the benefits, not the conditions, that cause the trouble. Far from least are the disincentives to save, both direct and indirect.
The NAPF talks about “encouragement to save” but this claim rests heavily on the current Minimum Income Guarantee and Pension Credit in the comparison. Don’t they know that there’s an elephant of a savings crisis out there, on which those two nonsenses are mere pimples? A Citizen’s Pension will make it worse, not better, by removing the last vestiges of a link to contributions or even to work (yet quaintly sticking to the comically named National Insurance as a means of finance), and by building in ruinous increases and expectations for public expenditure, already unsustainable.
What the NAPF should be putting firmly on the agenda is the dismantling of any universal State Pension, by phasing it out strictly under the accrual principle (so no current or accrued rights are affected). At the very least it should be proposing a full opt-out for all, not the closure of current partial contracting out. Most of the arguments made for a Citizen’s Pension can be made equally for a Citizen’s Wage and most of the valid ones can be made more strongly for nothing at all. There is nothing in the distribution of elderly income that suggests a universal benefit (on the whole, the old are probably less poor than most other age groups and there is an inbuilt redistribution from the poor, by virtue of National Insurance starting earlier together with a lower life expectancy).
It would be absurd to argue that if the Basic State Pension had never existed most of today’s retired people would need it. (In the nineteenth century, rich and poor alike saved for retirement as never before or since; now it is a mug’s game for many millions.) Any universally paid State pension reduces saving since it reduces the need for it. It also reduces thrift, work (one can retire earlier or do less work in retirement), voluntary action and family responsibilities. Most important of all, it is paid by the taxpayer, and tax itself is the biggest barrier to savings, driving a wedge between borrower and lender and reducing the net returns on saving. Oh, I nearly forgot deliberately low interest rates, part of the legacy of Keynes, who was pathologically anti-savings. Perhaps more of this anon.
