Michael Meacher

Labour Party | Oldham West and Royton

A three-point plan for pension reform - and why it's achievable

The Guardian

The pensions system is in turmoil, with 2.2 million pensioners  - more than a fifth of  the total in Britain - living below  the poverty line. 

The government's own projections  estimate that workers  on average earnings retiring in  2050 can expect to receive a  pension of about only £100 a  week at today's prices - below  the level at which means-tested  supplements are payable. 

This reflects the fact that  Britain is one of the most unequal  societies in the west - the  richest 10% now taking home  28% of total income; the poorest  10% getting less than 3%. 

When the gap between top  and bottom is some 179-fold -  between the employee on a national  minimum wage of £4.85  an hour, or £179 a week, and  the chief executives of the top  100 FTSE firms on, including  bonuses, an average £1.67m a  year, or £32,115 a week - an  adequate pension can only be  secured in one of three ways. 

Either the lowest earnings  levels have to be substantially  raised to project a pension  above the poverty level, the array  of means-tested assistance  in retirement has to be even  further extended, or the rules  for calculating the pension  must have a strongly redistributive  element built in. 

The Wilson-Callaghan  Labour governments chose the  third route by introducing the  state earnings-related pension  scheme in 1978. The latter, however, which would by the  time it matured in 1998 have  taken almost all pensioners  above the poverty line, was  emasculated by Margaret  Thatcher and replaced by this  government in 2002 as part of  its plan to shift pensions provision  to the private sector. 

This exposed a huge swath of  pensioners to the collapse in  private pension values in the  bear market of 2000-2003 and  led to a funding gap in occupational  schemes, estimated at  £61bn in the case of FTSE 100  firms alone, and a large fall in  the proportion of firms with  final salary schemes open to  new employees - from 56% in  2002 to only 38% this year. 

The third major failure has  been to allow employers to take  advantage of the long bull market  in the 90s by taking unilateral  contribution "holidays",  without provision for falling  market values. The Inland Revenue  estimates that companies  with a pension deficit skipped  contributions worth £27bn  during 1988-2001 and  employers saved about £4,000  per employee in the 90s. 

So what should be done?  First, the government should  accept that increasing the basic  state pension merely in line  with prices, plus topping-up  with the means-tested pension  credit, is unsustainable. The  basic pension, already only  16% of average earnings, will - on present trends under this  policy - fall to less than 9%  within 30 years. 

The Institute of Fiscal Studies  says the pension will be so  low that 64% of pensioners will  be eligible for the pension  credit in 20 years' time, and as  many as 82% by 2050. Worse, because of the means-testing, not everybody entitled gets it - nearly a third miss out. The basic state pension of  £79 per week should be increased  to the pension credit  level of £105 per week and  then linked to earnings.

The  net cost of this rise by 2005-  2006 would be £7.3bn; if it  were restricted to the over-75s,  where the vast majority of  poor pensioners are concentrated,  the cost would be  £2.7bn. But is this affordable? Britain's public pension system  is one of the most meagre; coupled with the erosion of the  private sector pillar, it is  untenable.

The average retiree  gets only a third of earnings, compared with nearly a half in  the United States and threequarters  in the Netherlands  and Sweden. In Britain the state spends  about 5% of GDP on pensions,  below half of its EU partners.

A  one-third rise in basic and future  indexation with earnings, requiring at most a further 1.7%  of GDP, is clearly achievable. The National Insurance fund  had a surplus of £29.3bn for  2003-2004, £20.1bn more than  the "reasonable working balance"  recommended by the  government actuary.

Second, given the vulnerability  of over-dependence on the  private sector, a much stronger  state pensions sector needs to  be built up with a strong  redistribution element to benefit  the poorest third. Even the  full state second pension  combined with the basic provision,  despite assistance to the  low paid and carers, provides  an income scarcely above the  pension credit guarantee. 

Third, government at present  grants £14bn a year towards  pension contributions, including half benefiting the  highest paid 10th of earners.  Why does a government so set  on using means tests inversely  concentrate tax reliefs on  those who need them least?

Michael Meacher is Labour MP for Oldham West & Royton