PENSIONS
We believe that the best pension scheme for Britain to move to is the so-called ‘Chilean’ system which has been endorsed by President Bush as a ‘great example’ for other countries. In an ageing world, pensions will become more important and President Bush is proposing a modified version of the Chilean system for the USA. He has said, ‘I believe that younger workers ought to be able to own a retirement account they call their own so they can pass it on from one generation to the other’.
WHAT IS WRONG WITH BRITISH PENSIONS?
1. The British state pension system is a bewildering medley of different insurance-based state pensions, means tested pension credits, handouts to the elderly, such as housing rebate, and Council Tax rebates, etc. It is seriously overloaded and complicated.
2. The British pension system (the old age pension – OAP) was created for a family and based on the insurance principle. The rise of the lifetime female worker and repeated tinkerings by various governments have complicated and eroded the insurance principle. Any proposed change to a citizen pension now being contemplated by the government will finally collapse the insurance principle and, according to Frank Field, will make Britain even more attractive to immigration.
3. The British state old age pension is cross-subsidizing the better off, who last longer, with the pension contributions of the poor. It also transfers money from Scotland and the northern counties where life expectancy is poor, to the long-lived areas of central southern England.
4. Due to an inadequate national accounting system there is no provision in the government balance sheet either for the liability to pay pensions to its own workforce or the liability to pay old age pensions to the general population. This means that whereas careful records are kept of British government borrowing, no records are kept of pension liabilities which are far greater. This is even more of a problem in the EU as most countries hardly have any paid pension funding and have vast unrecorded and unprovided for pension liabilities.
5. The government actuary states that 52% pensioners are now entitled to pension credit. This will rise to 82% by 2050. The reason is that pension credit is indexed to wages, while the OAP is indexed to prices. In other words, virtually all the elderly will become state supplicants.
6. The pressures on the private sector company pension scheme from a variety of sources, longevity, government taxation and under funding, have caused many to close. Company directors have also realized that a company pension scheme is a non-core activity, is risky and time-consuming. In the words of Frank Field, even if there is a recovery in the stock market, companies are unlikely to even offer again the widespread schemes which were in place before 1997.
REFORMS OF THE PENSION SYSTEM
i. All pension experts agree it must be drastically simplified.
ii. It is also worth trying to gain all-party support as the lifespan of a pension contributor at work and retirement can last 80 years. Frequent changes are costly, complicated and opaque.
iii. Workers will respond to a system where they have most control. They need to see clearly their contributions and their benefits.
iv. Equity demands the state pension is fair and that it roughly pays back to those who put in. This is not the case at present where Scotland and the industrial North subsidize the OAPs of southerners. For unfathomable reasons this is supported by Labour MPs.
v. The public sector’s occupational pension arrangements needs a drastic clean up. The funded liability for state occupational schemes has ballooned from £290 billion to £580 billion in two years to 2004 (not state old age pensions). That is to say, the liability for the state to pay occupational pensions to its own employees is more than the national debt. According to the Pension Regulatory Authority 650,000 new members joined state occupational pension schemes in two years to 2004. The retirement age for public sector employees should be raised to 65.
vi. The greatest rent seekers in the system are MPs and MEPs. An MEP acquires a fund of £166,000 pension benefits for serving one term of five years. MPs have notoriously voted themselves extremely good pension funds. There there are EU Commissioners. After eight years’ work, Neil Kinnock has just collected a cash payment of £277,000 plus an index linked pension of £63,900 pa for life – total worth, £2.3 million. Robert Kilroy-Silk has said it is time the gravy train hit the buffers and he himself will donate all his MEP’s pension to a charity for the elderly.
ADVANTAGES OF THE CHILEAN SYSTEM
Essentially, this provides an individual portable pension account which is entirely controlled by the worker who selects a pension manager and where the funds are totally under the state guarantee. Top ups can be made voluntarily to swell the pension pot.
I. In economic terms, the Chilean system has been highly successful.
II. The present British system of employee related private pensions as well as state run occupational schemes is harmful to movement of labour. How often does one hear the remarks, ‘I would leave this job but I cannot afford to because I have to consider my pension’.
III. The Chilean system empowers the individual worker who does not have to stay in a job or be beholden to directors or state bureaucrats.
IV. It is totally transparent. The worker can look up the value of his fund at any time.
V. As British workers are finding out, it is a huge risk to rely on an employer for funding a pension despite legal safeguards. Problems arise which are out of the control of the trustees and while the very largest companies may be secure and find it attractive to run a pension scheme, it is not attractive for an ordinary worker to tie up his ‘funds’, which is his biggest asset except a house, in a small or medium company fund.
VI. As in all countries where workers have to make greater individual contributions to retirement, such as the USA and Japan, more workers are eager to work longer.
DISADVANTAGES OF THE CHILEAN SYSTEM OR THE BUSH PROPOSED SYSTEM
a. The cost of management fees is generally criticised since the cost of state administration of accumulated pension funds of nationalized old age pensions is very low, but, in Chile, the cost of fees has been paid for by higher returns.
b. The bottom quartile of workers find it difficult to make ends meet anyway and would not be able to fully pay their contributions necessary to fund an adequate retirement fund. There is a case here for subsidy from the taxpayer.
c. The main argument critics use is the difficulties of the transition period. If there was an immediate switchover there would be a long period of double payments while young workers were paying taxes for old age pensioners and, at the same time, paying to build up their pension pot. This apparent problem is caused by the government’s inadequate financial accounting which does not allow for the accumulated old age pensions liabilities to be shown as a government liability. Once all those who were paid out of the state system had died, the liability would extinguish and in any case the liability would get smaller after 40 years as the first contributors to individual pension funds (Chileans) reached retirement. It could, therefore, be funded by government borrowing.
Taking a pension span, including pay in and pay out, at 60 years – it would work like this.
Outstanding Year 1 Year 2 Year 3 Year 60
Government Debt 100 101 102 160
Pension Liability 60 59 58 Nil
Total government liabilities 160 160 160 160
The liability for state occupational schemes, such as the NHS etc., should also be shown as a liability.
The present payment for old age pension is about £37 billion per annum, so this is a huge sum to be put in the government’s liabilities for 60 years but, unfortunately, it is true. (The figures above are purely illustrative and show accounting principles only).
FUTURUS/12 January 2007
WHAT IS WRONG WITH BRITISH PENSIONS?
1. The British state pension system is a bewildering medley of different insurance-based state pensions, means tested pension credits, handouts to the elderly, such as housing rebate, and Council Tax rebates, etc. It is seriously overloaded and complicated.
2. The British pension system (the old age pension – OAP) was created for a family and based on the insurance principle. The rise of the lifetime female worker and repeated tinkerings by various governments have complicated and eroded the insurance principle. Any proposed change to a citizen pension now being contemplated by the government will finally collapse the insurance principle and, according to Frank Field, will make Britain even more attractive to immigration.
3. The British state old age pension is cross-subsidizing the better off, who last longer, with the pension contributions of the poor. It also transfers money from Scotland and the northern counties where life expectancy is poor, to the long-lived areas of central southern England.
4. Due to an inadequate national accounting system there is no provision in the government balance sheet either for the liability to pay pensions to its own workforce or the liability to pay old age pensions to the general population. This means that whereas careful records are kept of British government borrowing, no records are kept of pension liabilities which are far greater. This is even more of a problem in the EU as most countries hardly have any paid pension funding and have vast unrecorded and unprovided for pension liabilities.
5. The government actuary states that 52% pensioners are now entitled to pension credit. This will rise to 82% by 2050. The reason is that pension credit is indexed to wages, while the OAP is indexed to prices. In other words, virtually all the elderly will become state supplicants.
6. The pressures on the private sector company pension scheme from a variety of sources, longevity, government taxation and under funding, have caused many to close. Company directors have also realized that a company pension scheme is a non-core activity, is risky and time-consuming. In the words of Frank Field, even if there is a recovery in the stock market, companies are unlikely to even offer again the widespread schemes which were in place before 1997.
REFORMS OF THE PENSION SYSTEM
i. All pension experts agree it must be drastically simplified.
ii. It is also worth trying to gain all-party support as the lifespan of a pension contributor at work and retirement can last 80 years. Frequent changes are costly, complicated and opaque.
iii. Workers will respond to a system where they have most control. They need to see clearly their contributions and their benefits.
iv. Equity demands the state pension is fair and that it roughly pays back to those who put in. This is not the case at present where Scotland and the industrial North subsidize the OAPs of southerners. For unfathomable reasons this is supported by Labour MPs.
v. The public sector’s occupational pension arrangements needs a drastic clean up. The funded liability for state occupational schemes has ballooned from £290 billion to £580 billion in two years to 2004 (not state old age pensions). That is to say, the liability for the state to pay occupational pensions to its own employees is more than the national debt. According to the Pension Regulatory Authority 650,000 new members joined state occupational pension schemes in two years to 2004. The retirement age for public sector employees should be raised to 65.
vi. The greatest rent seekers in the system are MPs and MEPs. An MEP acquires a fund of £166,000 pension benefits for serving one term of five years. MPs have notoriously voted themselves extremely good pension funds. There there are EU Commissioners. After eight years’ work, Neil Kinnock has just collected a cash payment of £277,000 plus an index linked pension of £63,900 pa for life – total worth, £2.3 million. Robert Kilroy-Silk has said it is time the gravy train hit the buffers and he himself will donate all his MEP’s pension to a charity for the elderly.
ADVANTAGES OF THE CHILEAN SYSTEM
Essentially, this provides an individual portable pension account which is entirely controlled by the worker who selects a pension manager and where the funds are totally under the state guarantee. Top ups can be made voluntarily to swell the pension pot.
I. In economic terms, the Chilean system has been highly successful.
II. The present British system of employee related private pensions as well as state run occupational schemes is harmful to movement of labour. How often does one hear the remarks, ‘I would leave this job but I cannot afford to because I have to consider my pension’.
III. The Chilean system empowers the individual worker who does not have to stay in a job or be beholden to directors or state bureaucrats.
IV. It is totally transparent. The worker can look up the value of his fund at any time.
V. As British workers are finding out, it is a huge risk to rely on an employer for funding a pension despite legal safeguards. Problems arise which are out of the control of the trustees and while the very largest companies may be secure and find it attractive to run a pension scheme, it is not attractive for an ordinary worker to tie up his ‘funds’, which is his biggest asset except a house, in a small or medium company fund.
VI. As in all countries where workers have to make greater individual contributions to retirement, such as the USA and Japan, more workers are eager to work longer.
DISADVANTAGES OF THE CHILEAN SYSTEM OR THE BUSH PROPOSED SYSTEM
a. The cost of management fees is generally criticised since the cost of state administration of accumulated pension funds of nationalized old age pensions is very low, but, in Chile, the cost of fees has been paid for by higher returns.
b. The bottom quartile of workers find it difficult to make ends meet anyway and would not be able to fully pay their contributions necessary to fund an adequate retirement fund. There is a case here for subsidy from the taxpayer.
c. The main argument critics use is the difficulties of the transition period. If there was an immediate switchover there would be a long period of double payments while young workers were paying taxes for old age pensioners and, at the same time, paying to build up their pension pot. This apparent problem is caused by the government’s inadequate financial accounting which does not allow for the accumulated old age pensions liabilities to be shown as a government liability. Once all those who were paid out of the state system had died, the liability would extinguish and in any case the liability would get smaller after 40 years as the first contributors to individual pension funds (Chileans) reached retirement. It could, therefore, be funded by government borrowing.
Taking a pension span, including pay in and pay out, at 60 years – it would work like this.
Outstanding Year 1 Year 2 Year 3 Year 60
Government Debt 100 101 102 160
Pension Liability 60 59 58 Nil
Total government liabilities 160 160 160 160
The liability for state occupational schemes, such as the NHS etc., should also be shown as a liability.
The present payment for old age pension is about £37 billion per annum, so this is a huge sum to be put in the government’s liabilities for 60 years but, unfortunately, it is true. (The figures above are purely illustrative and show accounting principles only).
FUTURUS/12 January 2007