The timidity of politicians, or why the State pension system is still broken for the young.


The timidity of politicians, or why the State pension system is still broken for the young.

Ros Altmann has appeared in the press last weekend in the Observer and has posted up on her website an argument for the abolition of the existing “Triple Lock”, replacing it with a “Double Lock”. (See http://pensionsandsavings.com/pensions/triple-lock-for-state-pensions-could-move-to-a-double-lock/).

At present the government is committed to raising pensions by the higher of 2.5%, or by wages or prices inflation. This is not without consequences and will lead directly to higher benefit costs and ultimately higher taxation.

Ms Altmann suggests linking pension increases only to wages or prices inflation, as the statistics suggest that pensioners are no more likely to be in poverty than the bulk of the population. Almost inevitably, the first comment on Ms Altmann’s website was from someone complaining that it was not fair.

Politicians hate having to make hard, though economically essential decisions; just looking at State pension age provides proof for that assertion. The transition of the female state pension age from 60 to 65 has probably been botched and the transition for all from 65 to 67 is hardly fool-proof either.

Just as turkeys do not vote for Christmas, politicians do not pursue policies that will be almost universally unpopular, even if failing to deal with a problem now will make it worse later. It is more common for the electorate to be offered a bribe, (privatization shares, right to buy, cheap loans and mortgages), than for the nettle to be grasped.

Back in the 1950s, when the State pension was worth as much in real terms as it ever was, (approximately half industrial wages), only about half of the working population would be alive to collect it. A paid retirement was for the privileged few and it would be a short one at that. (See http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp171776_253938.pdf).

To match the situation now, the state retirement age would need to be about 85, which is hardly practical for a number of reasons. As the older members of the population are more likely to vote, it is impossible to imagine the situation where an aging population will vote for a massively higher state pension age. Self-interest is a powerful motivation and politicians often seem to believe that their first duty is to get elected.

A further consideration is the pattern of health in later years; in the 50s and 60s, many more jobs were heavy manual labour; they would be incapable of continuing much past 65, assuming they were alive in any case. Even today, with more sedentary jobs, good health can only be expected into one’s 70s, with a period of poorer health before a demise.

So, given the social demand for a paid retirement and marked reluctance to increase direct taxation, what has been the government’s reaction?

Workplace pensions; the cynical amongst us would suggest this is a solution designed by committee to satisfy no one. If you are hoping for half pay at 67, then total contributions of 8% from 22 to 67 will be woefully insufficient. As a rough approximation you would probably need to double it! Conversely, allowing people to opt out, will hardly help.

The Pension ISA; George Osborne’s attempt to set up a savings plan more like the USA 401K, where taxed money can be placed in a no tax environment and used to buy a house or pay bills or support retirement. This is an attempt to get more engagement from the working population as pensions are seen as too complicated and too rigid, but we have not seen the detail. 

Reforming Higher Education; in the last few years, there has been a massive change in the funds for higher education, most recently maintenance grants for poorer students have been abolished. The system itself is not really a loans and debt system, it is more of a graduate tax. Whether its complexity is worth the results is a very moot point, but discouraging the young to make themselves more productive is hardly sensible.

The biggest point that needs to be understood by existing pensioners and those soon to become pensioners is that their National Insurance contributions do not pay for their state pension, it pays for those who had already retired. In order for the state to provide the state pension, the tax take in all its forms needs to increase to cover the rising numbers of pensioners, the rising level of pension and the increased longevity of those retired. Only those with personal pensions or fully funded occupational pension schemes have “paid” for their retirement. Every other pensioner is relying on the largesse of the working population as a whole.

For the young, the state pension is a very long way away and likely to be subject to change at awkward moments; certainty is making your own arrangements outside of the State pension and making the best of any tax breaks available.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

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