Pensions: We’ve been duped for 30 years – this is how to stop it, Part 3
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In a speech last week Nigel Farage formally committed Reform UK to the state pension triple lock if he wins the next election, promising to fund this by cutting the benefits bill. How, he didn’t say, suggesting a failure to understand the nature of the bottomless pension pit problem. It’s one that faces him or any incoming government, the truth of which is that the pensions system itself is one great benefits scam. This was clearly explained by Chris Philp in three articles he wrote for TCW earlier this year. We are republishing them this week under a more forthright heading in the hope of getting the message across, not just to Nigel Farage, but to Ben Habib and Rupert Lowe as well.
Philp’s challenge to these leaders of new parties on the ‘right’ is twofold. First, for them to call out the two parties of government responsible over 30 years for wrecking the original auto-enrolment scheme that made working people save for pensions; turning it into a benefits scheme which allows people to avoid work for life. How this was done incrementally they can read in Parts 1 and 2. Second, for them to bold enough to announce the solutions he sets out in today’s Part 3 – including limiting the pension rights of anyone not working a total of 35 years (including all recent arrivals, but not limited to them). You can read the first two parts here.
WE CAN solve the problems in the pensions system by simply reversing ‘the incessant ratchet of socialism’ and without making tough political choices because we don’t do it retrospectively, we do it from now on. To prepare for this, we need to give the Overton window a nudge by making people fully aware of what’s been going on with the pension system. And then:
Solution 1: Stop giving away tax/NI credits
We cannot continue to give away entitlement to the State pension. An income for the rest of someone’s life must be reserved for those who have earned it.
The simple (political) fix to NI credits
We must recognise that it would be political suicide for any party to try to remove existing entitlements from previous tax years. Apart from anything else, that would lead to poverty for many people. The answer must be to change the system from now on.
Nobody is going to be out on the streets, raging with Poll Tax levels of political fervour, about benefits they haven’t yet been given and to which they would still be entitled if they do something to earn them.
The pre-1996 system worked well: you had rights to unemployment benefit if you’d worked and paid NI in the preceding year. This gave a tax/NI credit for up to a year, after that you went on to Income Support which didn’t give credits. This encourages people to work for a living, supports them in times of need – and massively reduces the State’s exposure.
It can be implemented very easily – announce in a Budget statement that it will take effect from the start of the following tax year, giving people due warning that they have a few months to find work.
Solution 2: Stop the 0 per cent NI band giveaway
The same applies to the 0 per cent band which is increasingly unjustifiable when the minimum wage is higher than the 0 per cent band. Again, it should apply to future earnings in future tax years; it is not politically or morally right to cancel existing entitlements.
Solution 3: Reduce the level of Pension Credit relative to the State pension
It’s ridiculous to keep Pension Credit only £3 a week less than the State pension. Reduction may need to be done over time, and it would be helped by . . .
Solution 4: Keep the triple lock for the State pension, not necessarily for Pension Credit
With the above changes we can differentiate between earned pensions and gifted pensions. If it were ever necessary to remove any part of the triple lock, clearly it should apply to the gifted pensions, not the earned ones.
Once again, politically and morally this can be done only for future years. Over time, our pensions system would sort itself out and it would help us now, since forecasts by official bodies (OBR, IMF, credit agencies etc) would be rosier about the future.
When people call for means testing of the State pension they’re asking to add insult to injury by taking it away from the people who actually earned it! It’s hard to tell if it’s rank ignorance or rabid socialism; perhaps the two go hand in hand.
Solution 5: Remove the entitlement of foreign nationals
First, remove the entitlement to State pension via residency and replace with a citizenship requirement. Also limit the rights of immigrants to any Pension Credit or in fact any access to the State pension itself other than accrued by fully-paid NI years from working.
Solution 6: Produce stats on earned versus ‘soft’ NI records.
As noted in Part 2, such statistics are not currently available, but they must be. This will make it much more difficult for politicians to hide what they are doing. The very least the public need is to be able to see clearly what is being earned and what is being given away in their name – and to whom.
Solution 7: The UK government should invest (when possible)
It makes sense to allocate a proportion of NI takings to be used for investment, in the spirit of the original levy (a levy pays for specific things, a tax doesn’t). We could use it as contributions to a Sovereign Wealth Fund which could invest around the globe as Norway and other countries do with their oil revenues, then use that fund to pay for pensions (and perhaps more).
Of course, the government couldn’t do without NI these days since it is simply used in the same way as tax, but as soon as national finances allow it we should start investing some of the monies collected from employees’ NI so that in future pensions are not funded from current receipts.
Solution 8: Reduce public sector pensions
The other possible area of change is to reduce public sector pension entitlements in line with the private sector.
Of course, this is a political minefield which will see demonstrations in the streets by civil servants et al, but perhaps only if it’s done in one fell swoop. Perhaps a more softly-softly approach will be needed, a gradual realignment.
Solution 9: Make it easier to invest in personal pensions
Historically the annual and lifetime limits have been a blocker to saving for retirement, although the recent increase to £60k per annum helps, as does the abolition of lifetime limits.
In recent years experienced doctors, dentists, accountants, IT specialists etc often retired or simply stopped working due to tax changes, a major cause being that they were unable to contribute to their pensions.
For many people, it’s only in later life, after their children have left home and any mortgage is paid off, that they have any spare money to contribute to any significant extent to their pension, when their earning potential is at its highest and their outgoings at their lowest. By putting chunks of money into their pension in later years, they defer the tax until their retirement years. Note: defer, not avoid.
With people having children later in life and those children leaving home at an older age than in times past, the window for retirement saving has already become very narrow for most people on normal earnings without further limiting it due to annual contribution limits. Getting rid of annual limits would help ease this crisis – the more people who provide for themselves in retirement, the better off we will all be.
We constantly see pressures to reduce pension contribution limits from socialist politicians and media – this is ignorance at best, green-eyed politics at worst. It is not sensible.
Solution 10: Encourage final salary schemes
Final salary schemes were good for society when private companies offered those pensions to staff. Gordon Brown killed them off when he decided to tax the underlying schemes, not having the nous to know that their apparent over-funding was merely a momentary snapshot of something that deals in very long timeframes. We should remove those taxes and encourage schemes to re-start.
Avoiding political traps
There have been recent calls to ‘eliminate employees’ NI’. This is more underhanded politics.
It would mean tax increases to compensate: even though people proposing this don’t say it, it’s obvious that government is in no position simply to give up the revenue. However, people beyond State Pension Age (SPA) don’t pay NI – but they would pay any replacement such as income tax, so they would be heavily disadvantaged by this stealth mechanism.
Furthermore, in not paying NI, people working beyond SPA don’t get a chance to gain more full years in their NI record. So if they are expected to pay NI or an equivalent level of tax in future, at the very least they should also be allowed to accrue additional entitlement to the State pension (not that it would help anyone who already had the full 35 years).
And then, without NI, how do you determine who is entitled to a pension and who isn’t? Would the State Pension have fully morphed from a contributions-based scheme into ‘universal income at SPA’? That sounds . . . depressingly expensive.
Last word
Why is it that we never hear any politician of any party discussing the sorry state of UK pensions? Why do we endure political commentators endlessly muttering ‘the triple lock is unsustainable’ without any apparent understanding of what’s actually going on?
Perhaps there are too many socialists hiding behind blue-hued rosettes these days – or they just don’t want to be the government that has to fix the problems. Or maybe they don’t know how to fix them (and get elected) – easier to keep the truth hidden.
This series was written to help people understand what’s really going on with our pensions system and hopefully kick off some sensible policy debate by any party on the right. The pensions system doesn’t have to be the burden that it has increasingly become since 1996.
