Chartist, January-February 1998
Many commentators have rightly complained that social
security secretary Alistair Darling’s plans for reforming the pensions system,
announced at the end of last year, are insufficiently radical. The trouble with
the present system is simple. People are living longer but aren’t saving for
their old age. By 2020 we’d need to be paying a lot more tax to sustain state
pensions. This is politically unthinkable, and in any case – as Charlie
Leadbeater argued in the New Statesman
the other week – the tax system is in grave danger of collapsing before then
because of the growth of self-employment and Internet shopping. So it is
imperative that we act now to make sure everyone starts saving.
Yet Darling has done the opposite. His plan to retain the
basic state pension and pay a means-tested guaranteed minimum to those who have
not made their own provision suffers from a fatal flaw. A substantial
proportion of people who can well afford to save will choose not to because
they recognise that their chances of getting the means-tested pension will be
wrecked if they have money in a pension scheme.
The only solution to this “free rider” problem is to bring
home to these irresponsible non-savers the risks that they are taking. To coin
a phrase, we have to be tough on prodigality and tough on the causes of
prodigality. And the most effective way to do this is to abolish all state
provision for pensioners – the basic pension, means-tested income support and
the state earnings-related pension scheme.
This is perfectly feasible politically: I am not suggesting
abolishing any existing pensioners’ pensions, nor am I suggesting doing
anything to alarm anyone who will soon retire. My suggestion is that the state
should withdraw from pensions provision only for those whose 65th birthday
is on or after 1 January 2025. No one born before 1960 will be affected in any
way. And because everyone born in 1960 or after has 26 years or more still to
save before reaching 65, no one should have any difficulty in building up
sufficient funds: we are, after all, an affluent society. Provision would of
course be made for modest voluntary deductions from unemployment and disability
benefits to pay into individual pension accounts so that everyone is able to
feel that they have a stake in their future.
The economic advantages of abolishing state pension
provision are many. By 2065, the demands on the exchequer from pensions would
have become nugatory, allowing substantial reductions in income tax – with all
that means for encouraging enterprise. Equally important, taking the state out
of pensions would stimulate an ethic of personal responsibility and thrift,
which in turn would have substantial beneficial knock-on effects on the British
economy.
The less people spend and the more they save, the better the
government’s chances of maintaining unemployment at a level compatible with low
inflation – a particular headache if we are to join the European single
currency. If everyone saved 40 per cent of his or her post-tax income in a
pension scheme, the risks of runaway consumer demand causing the economy to
overheat would disappear forever.
Getting the state out of pensions would also allow many
older people to remain economically active for much longer. Older people are
one of the great under-used resources of this country, and many regret having
been forced into retirement at 65 when they are at the height of their powers
and believe they still have much to offer. The arrival of working over-65s on
the labour market would put welcome downward pressure on wage inflation, making
Britain even more competitive in the global market place.
There is no reason why working over-65s could not have the
same rights at work as everyone else. And if they lost their jobs, they would
of course enjoy the same rights to unemployment benefits – and the same
responsibilities to look for work. Anything else would be patently unfair.
However, it would be wholly utopian not to recognise that
older people have a greater propensity to fall ill despite the great advances
in medicine in recent years. So rules governing sickness and disability
benefits for working over-65s would have to be kept under constant review to
ensure costs to the taxpayer remain reasonable. On the other hand, because
working over-65s would enjoy enhanced mortality rates, the costs of long-term
care for the elderly who are genuinely incapable of working would be reduced.
I have no interest in benefiting from this proposal myself.
Indeed, as I was born in October 1959, I would narrowly miss out on being a
beneficiary – except indirectly as younger people’s changed patterns of
spending and saving have their macroeconomic impact. But the more I think it
through, the more its attractions become irresistible. Let’s hope Alistair
Darling still reads Chartist.
