Which are the welfare measures that save the most money?
I have taken a look at the table of savings from welfare changes. The most striking thing is how slowly they kick in. The saving in the next financial year is a mere £320m. The next year it rises to £2.6bn, then comes another big jump to £6bn and the final year of the review brings a saving of £7bn.
The biggest items in the final year saving of £7bn are
1. £2.5bn through not paying child benefit to families where there is a higher rate taxpayer.
2. £2.0bn Contributory Employment and Support Allowance: time limit for those in the Work Related Activity Group to one year.
3. £1.8bn increase of contributions to their pensions by public sector workers.
Source: Table 3 on Page 12 of the Comprehensive Spending Review
So in this Spending Review, while the HM Revenue and Customs budget will be expected to find resource savings of 15% through the better use of new technology, greater efficiency and better IT contracts – we will be spending £900 million more on targeting tax evasion and fraud.
This additional £900 million is expected to help us collect a missing £7 billion in tax revenues.
Nor will fraud in the welfare system be tolerated anymore.
We estimate that £5 billion is being lost this way each year.
£5 billion that others have to work long hours to pay in their taxes.
This week we published our plans to step up the fight to catch benefit cheats, and to deploy uncompromising penalties when they are.
That brings me to the wider welfare budget.
A civilised country provides for families, protects the most vulnerable, helps those who look for work, and supports those in retirement.
That is why one of the first acts of this coalition government was to re-link the basic state pension to earnings, and guarantee a rise each year by earnings, inflation or 2.5% – whichever was higher.
Never again will those who worked hard all their lives be insulted with a state pension increase of just 75 pence.
But this guarantee of a decent income in retirement has to be paid for at a time when people are living much longer than anyone predicted.
We should celebrate that fact, but also confront it.
Lord Turner’s Report on pensions, commissioned by the last government, acknowledged that a more generous state pension had to be funded by an increase in the pension age.
Even since its publication, life expectancy has risen further than it predicted.
Before the summer we launched a review on increasing the state pension age, and that has now concluded.
As a result, I can today announce that the state pension age for men and women will reach 66 by the year 2020.
This will involve a gradual increase in the State Pension Age from 65 to 66, starting in 2018.
And it will mean an acceleration of the increase in the female pension age already underway since this April.
From 2016 the rate of increase will be three months in every four rather than the current plan of one month in every two.
Raising the State Pension Age is what many countries are now doing, and will by the end of the next Parliament save over £5 billion a year – money which will be used to provide a more generous basic state pension as we manage demographic pressures.
Earlier this month, we also received the interim report from John Hutton’s Public Service Pension Commission.
I am sure the whole House will want to thank John for this excellent and independent piece of work.
I welcome his findings – and I hope it will form the basis of a new deal, that balances the legitimate expectations of hard working public servants for a decent income in retirement with the equally legitimate demands of hard-working taxpayers that they do not pay unfairly for it.
The elements of this new pension deal are clear.
We should accept that public service pensions continue to provide a form of defined benefit, and that there is no race to bottom of pension provision.
We want public service pensions to be a gold standard.
At the same time, we should accept that they must be affordable.
When these public service pension schemes were established in the 1950s, taxpayers made half the contributions.
Today they make up two-thirds of contributions, and the unfunded bill is set to rise to £33 billion by 2015-16.
So I think we should accept, as John Hutton does, that there has to be an increase in employee contributions, although I also agree with John that this should be staggered and progressive.
That means the lower paid – and those in the armed forces – are protected and the highest paid public servants, who get the largest benefits, pay the highest contributions.
The full speech is here.
This morning I appeared on Broadcasting House, a BBC Radio 4 programme. I was discussing what had happened to state welfare since William Beveridge's famous report. A Labour MP, Kate Green, was there taking a more favourable view of how things have developed than I do. It was a good, civilised, if brief, discussion.
I was honoured when Kate told me after the programme that she had read The Welfare State We're In. Sometimes people ask me what influence the book has had and I am never sure. I know that a signicant number of Conservative MPs and ministers have looked at it. But this is the first time a Labour MP has told me that she has read it. I am delighted by this since influence lasts better if it reaches both sides of the political divide. Not, of course, that Kate Green is likely to have agreed with it all by any means.
Among other things, I said that if Beveridge brought forward his plan today he would be regarded as a right-wing fanatic. The modern welfare state is a travesty of what he proposed. If his system had been put in place and persisted, much of the damage done by the welfare state would not have taken place.
He wanted a system of flat rate contributions for flat rate benefits. Means-tested benefits were designed be a tiny part of the system. In fact the very opposite has developed. Means-tested benefits are vastly more significant than unemployment benefit.
He did not specify any particular favours for lone parents. He was, provisionally, against special payments for housing benefit. He never even dreamed of those who became too ill to work being given more money or different conditions from those who are unemployed. The modern welfare state has very little to do with Beveridge. It is a corruption brought about by vote-seeking politicians - notably during the governments of Macmillan, Wilson and Heath - who knew and cared little about what could go wrong in welfare.
Beveridge proposed that the insurance flat rate payments should be at 'subsistence' level and that the non-insurance, means-tested assistance should be "something less desirable than insurance benefits; otherwise the insured persons get nothing for their contributions" (section 369). So the insured benefits would be 'subsistence' and the means tested benefits would be significantly less than that.
More on this, of course, is in The Welfare State We're In (chapter 2).
But here is a quotation on pensions and retirement that is not quoted in the book:
"...the conditions governing pension should be such as to encourage every person who can go on working after reaching pensionable age, to go on working and to postpone retirement and the claiming of pension." (Section 245)
A limited formal social security system means the Chinese save like crazy.
This is from a long article on the economic situation in China by Liam Halligan in the Sunday Telegraph.
The unintended consequence of the welfare state is that people save very little.
I was delighted to see a recent article in the Daily Telegraph by my former colleague Philip Johnston. Sometimes people ask me if I think my book has had any influence. Articles such as his clearly show an influence and, through him, must pass on the influence to others.
Philip made full use of the chapter in my book about the state pension. He did not mention me as the source of most of the historical material but I don't mind since he quoted from the book and mentioned it. He included quotations from Octavia Hill which I remember finding when reading through the proceedings of a royal commission in a library in the City. They are not quotations that get much of mention in most descriptions of the development of the welfare state.
Here is an extract of Philip's article:
The Beveridge Report, which laid the foundations of the post-war welfare state, declared that every citizen who paid his or her contributions should be able to claim an "adequate" pension worth more than any means-tested benefit. By the mid-1970s, the Labour Party was seeking re-election with a pledge to link the pension – long since lowered to start at 65 for men, and 60 for women – to earnings. Although that decision was reversed by the Tories in the 1980s, again the myth was perpetuated that the state pension could provide in old age.
Yet its value has declined over the years to the point where to rely solely upon the state pension is to be among the poorest people in the country. The average annual pension is now about £4,300, though this can be enhanced by winter fuel payments, pension credits or housing benefits, depending on your means. But even then, it is still far below what the Government itself considers the poverty line of about £12,500 a year, or 60 per cent of median average earnings.
After 100 years in which living standards have quadrupled, a pension designed to prevent the poorest in society enduring a penurious old age has failed in its purpose. The means testing of the supplements has discouraged thrift; while the assumption that "the state will provide" has rendered the responsibility of families to look after their elderly kin largely a thing of the past. Meanwhile, the cost of paying out the pension to a growing number of elderly people who are living longer means many will be required to work beyond their 65th year – as they used to before the pension was introduced – to make ends meet.
Might we have been better off without the state pension? "It seems likely that if the state pension had not been introduced, British people would have saved a great deal more and, overall, would probably now be wealthier in their old age," says analyst James Bartholomew, in his book The Welfare State We're In. "The late 19th-century trend for people to become less benefit-dependent would have continued, and it would be normal to have very substantial savings. Old people would have more independence and dignity in retirement."
The full article is here.
Dr Ros Altman, who apparently spent six years advising the Treasury and Number 10, says that 80 per cent of workers face a retirement in poverty and that "if there is one person in Government who is responsible for this pensions scandal, it has to be the Chancellor".
She is critical particularly of Gordon Brown's decision to scrap tax relief on dividends received by pension funds which is generally (though now probably inaccurately) said to cost the funds £5 billion a year. But - just as important - this withdrawal of tax relief has deterred many companies from offering company pension schemes any more.
Here is the most remarkable figure from the Daily Mail article today on the subject: apparently only 39 per cent of the working age population now have a company or personal pension. When Labour came to power in 1997, the figure was close to 60 per cent.
Unless these figures are misleading in some way, this is dramatic evidence of the failure of Gordon Brown. He has impoverished the retirement years of millions of the people. He just did not grasp the unintended consequences of his actions. It would tempting to call him a blundering fool. But he is something stranger than that: a blundering clever-clever.
According to the Mail (sadly the story does not seem to be online) Dr Altmann's comments will be made in an ITV1 documentary "Where's my pension gone?" to be shown on Thursday at 9pm.
Ruth Kelly was on the Today programme this morning and asserted that, under Labour, social justice had advanced. How does Ruth Kelly define 'social justice'? How does she measure it? The concept seems extremely vague. Does it mean giving more to the poor and taking more from the rich? So is the ultimate social justice when everyone has the same wealth? And does that not go by another name: communism? Has the concept of communism not been totally discredited by the vast and disastrous experiments in it during the 20th century?
It leads one to suspect that the phrase 'social justice' is a eumphemism for socialism or communism. And if it is not that, what is it?
Is it 'social justice' that:
The number of pensioners paying income tax has risen by 1.2 million under Labour, official figures reveal.
When Tony Blair entered No 10 in 1997 3.9 million men over 65 and women over 60 were in the tax net.
That figure has risen by a third to a record 5.1 million - nearly half the 11.1 Britons over state pension age, according to Government figures for the current tax year.
The Treasury put the rise down to the ageing population last night.
But the number of old age pensioners has only gone by 400,000 since 1997.
The above is from the Daily Mail.
Is the taxation of more old age pensioners a reflection of the greater 'social justice' in modern Britain? It remains the case, as I described in The Welfare State We're In, that the government defines a considerable number of people in this country as being in 'poverty'. It then taxes them. Many of these are pensioners. Rather more of them are now pensioners after Labour's rule. (I was glad to see the Tory spokesman Philip Hammond also making the point yesterday that the government taxes pensioners it defines as being in poverty.)
Incidentally, the Daily Mail is probably the most despised newspaper among the urban elite. But it keeps on picking up stories like this which tell us a great deal. It would be good to see some part of the BBC take this story on. The Today programme, for example.
Not long ago, someone commented on this site that whenever all or part of the NHS runs out of money, wards are closed or operations are delayed or some other cost-saving measure is taken. But never are salaries cut back.
The fact illustrates the way in which government-provided services, as opposed to commercial or charitable ones, have a particularly strong tendency to look after their staff first, rather than the customers (or patients or students) who receive the service. Of course it does not feel like that to the doctors, nurses, administrators, teachers and so on. It feels to them like they are badly paid and enduring difficult and frustrating conditions. This is often true, too. But the fact remains that their pay and pensions are kept sacrosanct that would not apply if they were in the commercial or charitable world.
Further evidence of this came at the weekend in this story:
Studies of the proportion of council tax used to fund pensions are usually restricted to contributions that go solely to the pension funds of local authority staff.
But Mr Anderson discovered the hidden cost to council tax payers was much greater - when the money used to fund centrally administered "pay as you go" schemes benefiting the police, firefighters and teachers was added.
"We calculate some 26 per cent of council tax receipts go towards public sector pensions. There's every possibility this figure will rise over the next five years as age-related costs continue to feed in."
Such is Mr Anderson's expertise that he is regularly called in to advise Government departments on pensions. His calculations were based on a trawl through the books of 16 county councils.
The full story from the Sunday Telegraph is here.
The government is going to reform incapacity benefit and demand that more of those people on it who are capable of work make real efforts to be get a job. That line could have been written almost any time since Labour has been in power. The fact that the government is announcing this intention yet again should not make us believe it is actually going to happen.
Here is the Guardian coverage of the speech on the subject by John Hutton yesterday. It is the usual thing and perfectly fine so far as it goes. But it does not go very far. And once Labour backbenchers have demanded that it be made less 'tough', it will travel an even shorter distance. The failure to reform incapacity benefit in Britain stands in marked contrast to the vigorous reforms in some states in the USA.
On dipping into the speech itself, I find a passage in which it almost seems that Mr Hutton might have read The Welfare State We're In:
Our predecessors – Hardie, Atlee, Wilson, Callaghan – would have been horrified to see how the notion of personal responsibility gradually became obscured over the decades as parts of our welfare system trapped people between the twin vices of benefit dependency and poverty. Once inside the benefits system, it was often difficult to get out. People were frequently better off on benefit than in work.
I am not sure he is right about Wilson and Callaghan, who bear much of the responsibility for the way it all went wrong. But he is surely correct about Hardie and Attlee. (He won't have got the mispelling 'Atlee' from my book.)
Mr Hutton can, up to a point, talk the talk. But I doubt he can walk the walk. The full speech is here.
One of the more interesting passages in his speech, arguing that there is a demographic need to get more people into work:
Maximising employment is equally essential for Britain to cope with the demographic challenge of a nation where people are living longer and healthier lives. By the late 2020s, nearly half of the adult population will be over 50. Over the next forty years or so, the numbers of pensioners will increase by 50%. Originally there were ten people of working age for every pensioner. Now there are four for every one pensioner; By 2050, two of working age for every one in retirement. Unemployment levels for people over 50 are relatively low, but economic inactivity rates are high and many people leave work early because of ill health. The economic consequences of these trends could be serious unless we take action now.
It is for those reasons that we have set ourselves the aspiration of working towards an 80% employment rate – reducing the numbers on sickness benefit by one million, and getting one million more older people and 300,000 extra lone parents into work.
To do that we must extend the principles of active, tailored welfare across the entire welfare state – providing help and support to the key groups that remain left behind.
Incapacity benefit remains one of the greatest barriers to social justice in Britain today. While 80-90 per cent of people coming onto the benefit expect to get back to work – many never do. After two years on the benefit, someone is more likely to die or retire than to find a new job. This is just not good enough.
And here is a clear indictment of incapacity benefit as it has been:
For all claimants, it is the passive system itself that traps people in poverty.
- Nothing expected of claimants, and little support is offered.
- The gateway to the benefit poorly managed, with some claimants receiving IB before even passing the medical test;
- There are perverse incentives to stay on the benefit – you get paid more the longer you claim;
- And those who try to plan their return to work through volunteering and training run the risk of proving themselves capable of work and losing their entitlement;
Even the name of the benefit sends a signal that a person is incapable – that there is nothing that can be done
The following is also interesting, especially the reference to housing benefit, which probably is far more important in causing benefit dependency than is widely realised.
Radically changing incapacity benefit is critical to giving more opportunity to those trapped by the current system, but the green paper will also seek to do more for other key groups who still face barriers to accessing the benefits that work can bring.
- We will set out proposals to do more to help lone parents balance their need to care for their children with the huge benefit to their family that a job can bring.
- We will bring forward measures to do more to help older people overcome the barriers to work which make their employment rates significantly lower than the population as a whole.
- And we will reform housing benefit so it better promotes personal responsibility and does not hold people back from working.
Gordon Brown has gave the thumbs down to the Turner Commission report on pensions on the basis that they were 'unaffordable'. But if Mr Brown become prime minister for just one day, his pension pot will double in size.
Below is a delicious letter by Lord Oakeshott, the Liberal Democrat peer, on this subject. One extra thing to bear in mind as you read it: Gordon Brown as Chancellor of the Exchequer has instituted a new system for other people's pensions whereby they get taxed heavily if their pension pot rises above £1.5 million or so. His own pension pot equivalent - as prime minister - would be over £2 million. The hypocrisy - if he takes it - would be awesome.
29th November 2005
Rt Hon Gordon Brown MP
Chancellor of the Exchequer
Horse Guards Road
London SW1A 2HQ
Affordability of Pensions – £2.13 million as PM for a day
You insist before Adair Turner publishes his long-awaited Report tomorrow that our country’s pensions must be affordable. Will you lead by example? Many millions in Britain face working longer, trapped in a vicious spiral of means testing because your Pension Credits undermine incentives to save. But you have to serve only another 4 years in Parliament to complete the 26 years and 8 months needed to be entitled to a full index-linked pension of £36,934 a year. It would cost you £1million to buy a comparable pension to the one you have already accrued as an M.P. from a private sector provider such as Prudential. You also have rights to an extra pension for your service as Chancellor since 1997.
If you took over as Prime Minister tomorrow, you would immediately be entitled to an extra pension of £62,418, fully index-linked for life, even if you only serve a day in the post. That would cost you £2.13 million from the Pru. How can it be right to take that on top of the generous pension you have already earned?
Pensions affordability starts at the top. Mr Blair may have made financial commitments on the basis of his retirement package, but will you give a lead by announcing now that you would not take the extra instant Prime Ministerial pension?
Liberal Democrat Pensions Spokesman
House of Lords
Quotation for G Brown – Born 20 Feb 1951 – Elected to Parliament 1983
(Fully index-linked annuity for life with surviving spouse’s annuity at 5/8)
Age Next Birthday : 55 PURCHASE PRICE
M.P’s pension: = 22.4 / 26.7 years x £36,934 p.a. - £1 million
P.M.’s Pension if appointed now = £62,418 p.a. £2.13 million
TOTAL £3.13 million
Gordon Brown's pension bungle (see below) was the lead item on the BBC's World at One on Radio 4 today. Notice one thing that is even worse than Mr Brown's wasting of other people's time and money. The objections to it are being made by the industry body, not by individual pension providers. Why? I am told by the personal finance editor of a national newspaper that it is because they are scared of reprisals. Apparently Legal and General once put its head above the parapet and criticised the government. It was victimised as a result.
If this is right, it is a terrible state we have reached. It is dreadful if companies dare not criticise the government in case they get singled out for rough treatment. It is the sort of thing we have, until recently, associated with uncivilised countries that do not have the proper rule of law.
The press and the BBC have, for once, been fairly critical of Gordon Brown and his pre-budget report. But not critical enough.
For the past year or more, the financial pages of all newspapers have been looking forward to the new pensions regime previously announced by Mr Brown. Standard Life said this morning that it, alone, had spent hundreds of thousands of pounds preparing for what Mr Brown had announced he would introduce - namely allowing pension funds to buy residential homes and other things such as fine wines. What Standard Life did, many other pension providers will also have done. So they have spent millions of pounds belonging to their shareholders - largely pension funds investing money for the retirements of many of us. Now Mr Brown gets up and says, "Ooops, sorry! I made a mistake. What I announced before is too open to abuse. I am now de-announcing it."
Except of course, he did not apologise. He has wasted money that was going to pay the pensions of millions of people. Pensions will, albeit fractionally, be lower as a result. But he did not apologise. The man has bungled. He has been incompetent. It has cost other people money. The press should have said all this bluntly.
For reference, here is a link the the Turner Commission final report on pensions. Here is its full web address: http://www.pensionscommission.org.uk/publications/2005/annrep/annrep-index.asp
As has been widely reported, it was killed before birth by Gordon Brown. Gordon Brown, the great means-tester, has been influenced, I would guess, by Treasury officials. They, like generations of their forebears since 1945, have understood very well what things will cost this year and next year. They have thought they understood long term costs, too. But they haven't.
What they have consistently failed to recognise is that if you means-test people they will, over time, adjust their behaviour so as not to waste their own efforts and their own money. So if you means-test pensions, then, over time, millions of people will save less or not at all and you will, over time, have to pay more people, more means-tested benefits. Then the cost will be so huge that you will have to cut the means-tested benefits. And people will be poorer.
In addition - and this is far beyond the ken of the Treasury - people will also have had their sense of self-sufficiency profoundly undermined and they might, in the process, be further alienated from the society in which they live. They would have every justification in loathing politicians (and senior civil servants) who get it wrong, leading them down the garden path.
It is a dangerous to have social policy framed by the Treasury. That is the lesson of the past 60 years.
The Turner Commission, while I doubt I agree with it all, is far more sensible than Gordon Brown. The report also has useful figures.
An article by me on MP's pay and pensions is on the First Post website here.
Currently 19% of the population is of state pensionable age. By 2055, that proportion will have risen to 26%. It is a simple statistic that supports the idea that either the state pension age must rise or the amounts paid in state pensions and benefits must fall further below average earnings. The statistic is fromPension Facts, a collection of useful data, from the Pensions Policy Institute.
The welfare state in its most ambitious form simply could not be afforded. So bits of the building have been quietly allowed to fall off. NHS dentistry has been in decline for a long time. So have NHS spectacle. Council housing is gradually declining as a proportion of total housing stock. And another thing that has been found to cost too much is a relatively high level of state pension from the age of 65. It has steadily declined in relation to average incomes (and been replaced, to a large extent, by the disastrous means-tested pension credit).
The papers today have a story that the state pension age could be raised to 67. This will be a long overdue acceptance of vastly increased longevity. It is an example of the way the state is very slow to respond to changes in reality, in marked contrast to mutual or commercial providers. Even now, the the proposal is only that. It is not an act of parliament. More concrete are the figures that came out in yesterday's papers:
During 2003-04 the state pension accounted for 51p of every pound a pensioner received, but by next year this is set to fall to just 46.9p, according to research carried out by Datamonitor, the market analysts, for Prudential, the financial services group. The report predicts that, based on current trends, the state could be providing just 44 per cent of people's pension by 2013-14.
People will, instead, become increasingly reliant on private provision to support them during retirement, such as personal and occupational pensions, savings and investments and unlocking money from their homes.
The shift is a far cry from 1908 when the Old Age Pension Act was set up by Lloyd George's Liberal Government to provide the majority of retirement income for people over 70 on low incomes.
Even in 1979 state benefits still accounted for nearly two-thirds of the average pensioner's income.
That is from the Daily Telegraph coverage.
It is quite a change. State pensions provided nearly two-thirds of pensioners' incomes in 1979 and are now expected to be down to 44 per cent by 2013-14.
It is a shame that people have been misled by politicians - notably Gordon Brown - about what pensions they could expect.
A decent government would tell people frankly "the state will not provide - get saving". But that would amount to politicians not promising to give money away. So don't hold your breath.
An extract from an OECD press release today:
If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.
The full press release is below.
OECD - Paris, 10 October 2005
Living longer must mean working longer, says OECD
In an era of population ageing, we can no longer afford to waste the valuable resources that older workers offer to business, the economy and society. That is the message from a new OECD report to be discussed at a high-level forum on Ageing and Employment Policies in Brussels on 17-18 October.
At present, many public policies and workplace practices discourage older people from carrying on working. On average in OECD countries, fewer than 60% of people aged between 50 and 64 have a job, compared with 75% of people in the 25-49 age group (see Chart 1).
Such policies and practices are relics of a bygone age and unsustainable at a time when population ageing is straining public finances and holding back higher living standards. If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.
This, in turn, would lead to higher taxes and/or lower benefits, coupled with slower economic growth. On the basis of unchanged patterns, OECD analysis shows, GDP growth per capita in the OECD area could shrink to around 1.7 % per year over the next three decades, about 30% below the average annual rates witnessed between 1970 and 2000.
To avoid such an outcome, the OECD argues, age-friendly employment policies are needed to encourage older people to remain longer in the workforce. At present, average effective retirement ages are well below official retirement ages in many countries, especially European countries (see Chart 2). While countries have begun to take action – notably in the area of pension reform – more needs to be done.
The OECD recommends action in three key areas:
Governments should ensure that pensions and other welfare arrangements encourage rather than discourage work at older ages. They should also devote adequate resources to help older jobseekers find a new job.
Employers must end discrimination and adapt work practices to an age-diverse workforce. The practice of mandatory retirement in firms should be questioned, as it is inconsistent with the general objective of providing greater choice to older workers on when to retire.
Older workers themselves will need to change their attitudes towards working longer and acquiring new skills – there is a training gap between older and younger workers in all countries, but in some countries it is particularly large (see Chart 3).
On 17 October, government officials, social partners, academics and representatives of civil society will meet at Palais d’Egmont in Brussels to discuss the main lessons that have emerged from an OECD review of policies in 21 OECD countries to promote employment of older workers. These discussions will be open to the media.
On 18 October, ministers and senior officials will meet in closed session to discuss a range of issues, including: how best to make later retirement more attractive; how to change entrenched attitudes; and how to promote the employability of older workers. A press conference will be held at 3.00 p.m. on Tuesday 18 October at Palais d'Egmont.
Information on the forum and access to summaries of the separate country reports that have been prepared for 21 OECD countries can be found on the following site:
People don't save enough for their retirements.
People in their 30s could be forced to continue working until they are more than 74 unless they dramatically increase the amount they save, an insurer has warned. Prudential said people in their 30s were setting a side an average of just £62 a month towards their retirement - £340 a month less than they need to.
The group said in order for someone on average earnings to retire at 65 on two-thirds of their pre-retirement income, including money they would get from the state pension, they should actually be saving around £400 a month
Why don't people save more?
There are two reasons for the under-saving. First, the government strongly disincentivises saving by the poor. Most means tested benefits are not payable to anyone with financial assets of more than a specified amount. It used to be £15,000 - I don't know the up-to-date figure. But it means that anyone who is - or thinks that in the future they might be - on means tested benefits, has a strong disincentive to avoid having savings of any substance.
Gordon Brown has added to this the Pension Credit which is a means-tested benefit for the elderly. This has pushed the discouragement to saving up towards those of more means. The pension credit means the benefit of saving - including saving through a pension fund - are seriously reduced unless one accumulates well over £100,000.
The second way in which the government has discouraged saving is through the state pension. The existence of the state pension makes people think, 'The state is looking after my pension. I don't need to think about it'. At some point in their lives, they discover this is not true. The state will not look after them in old age. The state pension is tiny. But they often discover the truth too late to do anything about it.
An honest politician would say: "Don't rely on the state pension. It is very small and it is continuing to get smaller compared to average incomes."
A decent politician would take means testing out of the equation by easing out the pension credit.
An open-minded politician would, as Peter Lilley did, propose a new pension scheme for younger people which would be invested in stocks, shares and bank deposits.
A radical politician would propose the gradual but wholesale abolition of the state pension, leaving only income support for those people who had made no provision for their old age. That is the policy that would have the most dramatic effect in encouraging a saving culture in Britain, just as it has a dramatic effect in Hong Kong.
The article quoted come from the
Five million out of 5.7 million public sector employees (88 per cent) have final salary pensions. Meanwhile only 3.6 million out of 22.5 million private sector employees (about 16 per cent) have final salary pensions.
These figures, accourding to the Sunday Telegraph, will be published by the Government Actuary's Department on Thursday. There have been a fall of one million in those in the private sector who are on final salary schemes over the past five years. That is largely the effect of Gordon Brown's tax on dividends received by pension funds which has helped make final salary pension schemes just too expensive for private companies. But what is too expensive for private companies, is not too expensive for taxpayers to pay for.
The civil servant, the teacher and the hospital manager all get relatively luxurious, final salary pensions, courtesy of taxpayers. The MPs and the prime minister get the most luxurious pensions of all.
This is the 'producer interest' at work. Politicians and civil servants create the rules which favour themselves, rather than those they are supposed to be serving. It is easer for public servants to pursue their 'producer interest' than for those who are in private companies. That is a fundamental reason why governments are less efficient in all their activities. They waste money. In this case the waste arises becaue it would be perfectly possible to hire the same public servants at the same wages - or only fractionally higher - without their relatively luxurious pension schemes. Public money is spent which could have been saved.
The taxpayers pay for this waste and these taxpayers include those paying income tax on incomes of a mere £5,000. In other words, people who are very poor pay tax to finance the unnecessarily high pensions of public servants. It is, of course, a scandal. But don't expect the BBC to be outraged. They are public servants. And don't expect politicians to say anything. They are a) public servants and b) don't want to offend the other 5.7 million public servants who are also voters.
All this is without going into another scandal in public servant pensions: the all-too-easy and frequent early retirements in the fire service and several other public services.
I do not accept the use of the word 'poverty' as redefined by Left-wing propagandists, but it is probably still worth mentioning the following. It shows that, even by the Left's own standards and measures, it has failed the elderly.
The National Pensioners Convention (NPC) said an estimated 2.2 million older people, the equivalent of one in five pensioners, currently lived below the poverty line, the same number as in 1997.
The above is from Tiscali News. According to the Daily Mail, the NPC is a Left-leaning organisation.
More and more state spending is going towards paying the pensions of public sector workers.
'In Greater Manchester, total pension payments for fire-fighters are put at £30.4 million in 2005-06, compared with salary costs of £74.9 million. This amounts to a doubling of pension payments in the past eight years... Council tax payers in the area have seen the amount that they pay for fire services rise by 68% over those eight years… [But] net of inflation and pensions, the Fire Authority’s budget has actually reduced by 7% over the period.’
There is nothing wrong, in principle, with money being spent on the pensions of public sector workers. The problem is with the practice. From the taxpayers' point of view, these pensions are unnecessarily and wastefully big, for two reasons:
First, they are unnecessarily generous to attract people to work in the public sector. Most people when they start on a career in their 20s, have little or no concept that public sector pensions are vastly higher - in relation to the salaries - than those provided by the private sector. So the employees could be hired to serve us at lower cost.
Second, these luxury pensions are then abused and effectively inflated still further. Police and firemen and other public servants take early retirement on excellent terms far more frequently than people in the private sector.
Why does this happen? It is a simple case of the 'producer interest' at work. Those who are in charge of such things are, at the same time, part of the workforce that benefits from 'generosity' (as some may call it) or 'selfish waste of taxpayers' money' (as it should more rigorously be viewed).
According to Stephen Yeo, an actuary at Watson Wyatt, the bill taxpayers will have to pay for the final salary pensions of the five million public sector workers has risen dramatically in the last two years from £425 billion to £700 billion. That is nearly twice the size of the national debt, yet you will not find it in the Treasury's accounts.
From an article by George Trefgarne in the Daily Telegraph.
A key issue for those of us who believe the state is bad at looking after people, is whether or not individuals are any good at it either.
This is Tim Congdon in the Telegraph today on the competence or otherwise of people in saving:
Much of economic theory is concerned to establish that people are rational. But theoreticians and practitioners do not always see eye to eye. When confronted with real-world problems, economists are inclined to forget that they live in a world of rational agents.
Indeed, they are quite unembarrassed about offering recommendations to politicians which make sense only if people are rather silly. A good example is the recent report from the Pensions Commission, under the chairmanship of Adair Turner.
It says flatly: "Most people do not make rational decisions about long-term savings without encouragement and advice.'' The report proceeds from this patronising remark to recommend increased state involvement in pension provision, with a consequent enlargement of the government's role in the economy and a rise in taxation.
Professor Congdon goes on to look at the overall savings people make including saving that is not labelled "pension saving" but which nonetheless can be used for that purpose. He concludes that people are perfectly rational. His analysis may be open to challenge. But I want to mention another area in which the rationality of people in looking after themselves may be in doubt.
In America, people have to pay for their own healthcare. But in the same country, the incidence of obesity is very high. Why, when they must know that being fat increases their chances of premature death and early use of expensive healthcare, do so many Americans allow themselves to become fat? It does not seem sensible or rational.
One possible answer may be that American laws - particular tax laws - incentivise people to have company healthcare plans which apply to everyone in the company in similar ways, regardless of their lifestyles and obesity. So although American healthcare is mostly privately paid-for, it is far from operating in a free market. In a free market, health insurance premiums would be lower for those who were not fat and so being thin would be financially rewarded. The same would go for those who have no insurance and pay for healthcare as and when they need it. On this basis, people are still perfectly rational. Their behaviour has just been distorted by government interference.
A second possible answer is that people just can't help themselves. The lure of salt, sugar and fat are just too great for human beings after millions of years of evolution in which our bodies were trained to go for sweetness and fat at any opportunity.
I have not done enough work on this to have a strong view and would welcome comments on this and also other areas in which individuals have or have not shown themselves to be capable of looking after themselves.