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The House Magazine - Britain’s Pensions Crisis
In 1997 British pensions were, if not the envy of the world, at least one of the better-funded and more solid systems of providing for retirement. Of course there were problems – pensions mis-selling and Robert Maxwell, for instance – but the ‘demographic timebomb’ of more and more pensioners supported by fewer and fewer workers didn’t tick nearly as loudly in Britain as in the rest of the developed world.
Since then, in spite of continuous economic growth, a crisis has loomed. Rising taxes, especially Council Taxes, have cut pensioners’ standard of living in the same way as rampant inflation under the last Labour government in the 1970s. Incentives to save have been whittled away, storing up trouble for future generations of pensioners. And pensions regulations, already complex, have become impossibly baroque. Making sensible savings decisions has never been more difficult and intimidating for the man in the street than today.
The Government must address two issues. Firstly, the system has to be simplified so it’s transparently sensible for everyone to save for their retirement, and so that everyone knows roughly how much pension and benefits they’ll get for a particular level of saving. Only then will incentives to save work properly.
Secondly, the state pension must regain public trust. What started off as a saving scheme to provide dignity and security in retirement is increasingly seen as just another means-tested benefit. Charity for those with no other means of support. Payments have been whittled away, and rising taxes have clawed money back. If a private pension provider like Prudential behaved this way, policyholders would take them to court and win. No wonder politicians aren’t trusted.
Unfortunately, the simplest solution is probably unworkably expensive. Individual, fully funded savings schemes built up over each person’s working life would address all these issues. But switching from our current under funded pay-as-you-go system would be incredibly expensive, because the current generation of workers would have to pay twice – once for itself, and once to maintain its parents’ pensions too.
That leaves only three basic policy choices. Governments can either pay lower pensions, raise the retirement age, or introduce compulsory saving through increased taxes and NI or private schemes. Since they’re all electorally challenging, expect a large dose of fudge to sweeten the pill.
Of course, fudge comes in a variety of flavours. The Government is already moving towards reclassifying some houses as pensions savings. This probably won’t increase the total savings rate, but as least it will make pensions figures look better. The catch is that richer families will benefit most, because they’ll be able to afford the fancy tax structures which will be needed.
Another wheeze is to abolish the mandatory retirement age as part of an anti age discrimination package. This will genuinely make a difference to Britain’s economy, because most people will end up working longer to achieve a better pension. We all value choosing for ourselves when to retire, because it gives us more flexibility and control over our lives. But it’s basically a stealthy way of raising the retirement age, and will take all this Government’s formidable powers of spin to sell to a sceptical population.
If I was David Blunkett, I’d be worried about the ticking sound growing louder in the background. Like the crocodile creeping up on Captain Hook, the demographic timebomb is getting closer. The difference is, instead of a fairytale baddy getting his just desserts, this one could blow us all up.
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