THE £ECHLADE GROUP
Discussion Document 7
January 2006
The Lechlade Group is comprised of members of the UK Independence Party who aim to evolve UKIP from being perceived as a pressure group to a party with a broad range of policies acceptable to the electorate.
The group will be issuing a series of papers outlining their recommendations to achieve this aim.
Paper 7: PENSIONS – Crisis Or Opportunity?
The Interim report produced by The Pensions Commission under Sir Adair Turner [1] in October 2005 provided an excellent analysis of the state of UK pensions. In summary: -
The Perceived Problem according to Turner.
· People living longer, falling birth rate means there will be fewer workers to support pensioners.
Year 2005
2050
No of pensioners
9.6 Million
18 Million
Workers per pensioner
3.68
1.96
Solution Choices available.
· Increase government spending on pensions
· Encourage an increase in private pension contributions
· Increase the retirement age (as Turner report)
(Or a combination of any or all of the above solutions)
In this paper we will challenge these solution choices and offer an affordable and acceptable alternative for the people of Britain. We believe that the ‘pension crisis’ offers an opportunity to build a pensions system that is fit for the British economy in the 21st century.
THE £ECHLADE GROUP IS COMMITTED TO RETURNING THE GOVERNMENT OF BRITAIN TO THE BRITISH PEOPLE.
What has the government been doing to solve the problem?
· The introduction of the Stakeholder Pension.
Largely this scheme has been a failure (Less than 25% of Stakeholder schemes receive any form of contribution) and almost completely misses the target market.
· The simplification of company and personal pensions.
The Pensions Act 2004, in force from 6th April 2006 crystallises the many pension regimes into just two and as such is welcome.
· The Turner Report.
This recommends a staged increase in retirement age to 68 by 2050.
· The Pension Credit.
In effect a means tested top up to the basic state pension, which acts as a disincentive for people to save for retirement.
Any personal pension income is deducted from the top up thus unless a saver is able to contribute significantly into personal provision to lift them well above the Pension Credit level then there is no incentive for them to make any private provision. [2]
This affects the lower paid in particular.
· Increasing immigration of younger workers.
This is in line with the EU solution to maintain the balance between workers and pensioners. The Cass Business School has quantified the number of new workers needed to achieve this balance in the UK alone as being 10,000,000 by 2020. [3]
Clearly this is a short-term fix of the pyramid scheme variety. Those 10,000,000 workers will themselves become pensioners and need ever more new workers to support them in retirement. This is in addition to the infrastructure and support costs of mass immigration.
These are the wrong problems and the wrong Solutions.
They all act on short-term popularist policies. Pensions need a long-term solution and facing the truth about income in retirement will not be popular
The current government’s lack of true commitment to the problems facing us is reflected in the fact that in the eight years since they came to power in 1997 we have had fifteen different Pension Ministers.
A Further Concern………..
The funded pension provision in the big four EU economies is: - UK = 74.7%, Germany 5.8%, France 5.6%, Italy 3.0%
Worse still, whilst the UK’s unfunded liabilities amount to 20% of GDP the other three main EU economies all have pension deficits greater than 100% of GDP.
In March 2000 the Council of Ministers drew up the ‘Lisbon Agenda’ of targets to be met by 2010 to solve their pension problems: -
· An annual growth rate of 3% in GDP for ten years
· To achieve full employment
– with an interim target of 70% employment by 2010
· To raise the numbers of women in employment from 51% to 60%
As of 2006 no progress at all has been made to achieving any of these targets and only the UK has exceeded these figures, (apart from GDP growth this last year).
In 1996 the House Of Commons Select Social Security Committee on “Unfunded Pension Liabilities in the EU” stated; “The UK’s current National Debt is equivalent to about £5,000 for every man woman and child in the country. If we add on the burden of our unfunded pension liabilities the sum would increase to approx £9,000 per person. If we make a further addition for the liabilities of unfunded pensions in the rest of the EU then the per capita figure for the National Debt would exceed £30,000. The adoption of a single currency would entail the adoption of a single balance sheet, but the extent of unfunded pension liabilities in certain of our partner countries casts serious doubt upon the long term sustainability of their finances” [4]
Make no mistake; the EU pension liabilities are a problem for the UK if we stay on course to become part of a ‘federal’ single currency Europe. [5]
Solving the problem - Part One: The Citizens Pension
We need to be honest with the nation by making it absolutely clear that the state pension will be what it started out as in 1908:-
AN ABSOLUTE GUARANTEE AGAINST ABSOLUTE POVERTY.
Nothing else. The State Pension will provide for life’s bare essentials. Anything above the basics it is up to the individual to make provision based on their choice of what lifestyle they want in retirement.
In September 2005 The Pensions Policy Institute produced a report [6], which recommended affordable reforms to the State Pension system.
In essence, State Pensions based on National Insurance contributions would be replaced to one based on residence, funded by scrapping ‘Contracting Out’ and diverting the SERPS Rebate to fund these new ‘Citizens Pensions’.
After a transitional period the existing state pension; the earnings related Secondary Pension, (Graduated Benefit, SERPS and SP2), and means tested Pension Credit system will be replaced by the flat rate ‘Citizens Pension’.
Qualifying for a Citizen’s Pension.
There will only be two criteria, length of residence in the UK and at what age the pension will be payable.
The criteria will be twenty years residence in the UK, 5 of those years in the last 10. [7]. Thus women who have taken time out to bring up a family or look after elderly parents will not be disadvantaged.
Level of payment of the Citizen’s Pension.
The indexation of pensions to National Average Earnings, rather than RPI, will be restored.
We intend to start the Citizens Pension at £125 a week, which is the existing Savings Credit level and a figure that the government regard as the ‘poverty line’.
Married couples will receive 150% of the single persons rate and pensioners living with others, shared accommodation, sheltered housing or same sex relationships will receive 90% of the flat rate.
This may appear to disadvantage those that are married, however, changes propose making to income tax will more than compensate this. [8]. It may also be argued that an enhanced flat rate pension gives an advantage to higher earners. However under the current regime, those with higher lifetime earnings ready accrue a higher pension because the Secondary Pension Schemes are earnings related. This advantage will be removed.
The Citizens Pension is thus more beneficial for those with lower or indeed no lifetime earnings. The disincentive to save for retirement that exists under the current means tested regime is eradicated. This is an encouragement to all, especially the better paid, to make their own additional provision to maintain the lifestyle that they want in retirement.
Cost of the Citizen’s Pension.
If the scheme begins on the 6th April 2010 (the earliest it could be implemented) then the cost to the taxpayer that year would be £32 billion.
During the transition period, [9], there are savings of £12 billion on this figure. Ending contracting out rebates will save £11 Billion; Scrapping the Pension Credit system saves an additional £11 billion.
Thus the net cost is a saving of £1 billion.
The increased pension will give pensioners more to spend and it is estimated that this will produce an additional £2 billion in tax revenues however, this amount will be absorbed by the transitional costs of maintaining existing Savings Credits during the transitional period.
There are also savings to be made in the reduced administration costs of a flat rate Citizens Pension in the region of £5 billion a year, however we are not taking these into account as these will be balanced initially by the transitional costs.
The current projected cost of the State Pension in 2050 is 5.7% of GDP, however, at the moment only 70% to 80% of those who are eligible claim the Pension Credit. [10]. With the State Pension reducing in relation to NAE, it is expected that there will be a greater take up in the future so the total cost can be expected to increase by up to 7.5% of GDP; the NAPF paper suggests a median figure of 6.6% of GDP be used.
The cost of the Citizens Pension by 2050 will be 9.2% of GDP. This is an additional 2.6% i.e. £30 billion. How this cost will be met is explained following.
Solving the Problem - Part Two : The Productivity solution to an aging population.
The traditional approach to quantifying the pension problem has always been to calculate the number of people in the available workforce needed to support each pensioner and thus calculate the amount each would have to pay in tax and NI to provide those pensions.
Current projections are that by 2050 there will be 4.4 million fewer workers, [11], to provide for an additional 8.4 million pensioners, [12].
This is the argument that has prompted the European Union to adopt a policy of increasing the immigration of young workers from outside the EU.
However, what these figures don’t take into account are the population who have not yet entered the workforce who also have to be supported by them.
Nor does it include those of working age who are classified as ‘ not being economically active. [13]
Taking these into account gives a true figure for 2005 - 27.5 million actual workers are supporting 31.8 million non workers. i.e. each worker supports 1.16 non-workers.
If we can create productive jobs by expanding the economy to employ many of the economically inactive then the number of workers will become 29.5 million to support 29.8 million non-workers, a support ratio of 1.01.
Further economic improvements such as equalisation of the retirement age (to be implemented anyway in 2010) and increasing the economic activity rate (EAR) of those aged between 60 and 65 to the same as that of younger workers increases the support ratio to 0.94 per worker.
We accept that this would effectively mean full employment, which is too idealistic, but we have used these calculations to show how small improvements can make a significant difference.
Tomorrow’s Company in their paper “The Aging population, Pensions and Wealth Creation”, [14], argue that the workers also produce for their own consumption and thus support themselves. They therefore calculate the support ratio in 2003 to be 0.48 falling to 0.45 in 2041 – about the same as it was in 1961 before the ‘baby boomers’ started entering the workforce.
Their prognosis, like ours, is that we can afford decent pensions if we get genuine growth in the economy. What is required is: -
· To have a strong corporate sector of companies of all sizes that are globally competitive.
· To continue to be an attractive choice for foreign direct investment for world class companies with world class research facilities in such fields as biotechnology, nanotechnology, new sources of energy and other horizon industries.
· A quality of education at every level from pre-school to the universities, which matches the highest international standards.
· Greater emphasis on skills training.
· Hi-tech business start-ups and more of these developing into major companies.
· A much improved national transport infrastructure and the adoption of modern telecommunications technologies.
· More long term investment projects.
What we absolutely do not need is the cost of more new workers – what we do need is the creation of more jobs and increasing the productivity levels of those in work BUT we cannot implement these needed strategies whilst we continue to be part of the European Union and subject to a centralised pan-european plan that best serves the EU and not the requirements of the UK.
Outside of the European Union the UK, the World’s fourth biggest economy, can set a course to pay it’s citizens a decent pension.
Inside the EU we will be dragged down by their pension burdens and a declining economy.
The Lechlade Group. January 2005.
The Lechlade Group can be contacted through:-
David Lamb. 5 Marfleet Close. Lower Earley. Reading. Berks. RG6 3XL.
Lechlade@thebrainsugery.co.uk
Appendix:
[1] Turner report executive summary :-
http://www.pensionscommission.org.uk/publications/2004
Full report: -
http://www.pensionscommission.org.uk/publications/2005
[2] To purchase the equivalent of the Pension Credit would require a 35 year old to save £76.00 a month, (Using 7% growth rates and 3% average inflation), in a personal pension.
Thus unless a saver is able to contribute significantly more than this into personal provision to lift them well above the Pension Credit level then there is no incentive for them to make any private provision.
[ 3 ] http://www.cass.city.ac.uk/media/stories/story_13_45816_43477.html
Cass Business School. 106 Bunhill Row. London. EC1Y 8TZ.
[ 4 ] House of Commons Select Committee, “Unfunded Pension Liabilities 1996”.
“As the UK's outstanding public pension liabilities are substantially below those of other EU members, There would be a risk that if the UK joined a single currency British Taxpayers could be called upon to help finance the ‘pay as you go’ pension obligations of the EMU members, or suffer the consequences of being tied to interest rates on the single currency that were forced upwards by the market pressures of financing certain countries’ inherited pension commitments” The Treaty of Maastricht states that no country can be forced to bail out another. However, if we have tax harmonisation – and if we have full integration we have to have tax harmonisation as to allow otherwise would give one country a competitive edge over the others – then those tax rates will be set to take into account the unfunded pension liabilities of the rest of the EU.
However, there is a separate clause, which can be used to bail out member states in trouble. In the Treaty of Nice this article was brought under the Majority Voting Procedure. Article 100(20 TEC: - “ Where a member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council may, acting by a qualified majority on a proposal from the Commission, grant under certain conditions, community financial assistance to the Member State concerned” Secondly, the so called “no bail out clause” itself contains a bail out loophole: - “Article 103 TEC, Part 1)“The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments etc, (as above), of another Member State, without prejudice to mutual etc, (as above). Part 2): If necessary, The Council, acting in accordance with the procedure referred to in Article 252, may specify definitions for the application of the prohibitions referred to in Article 101 and in this Article.” When Part 2 refers to Article 252, this means the Qualified Majority Voting Procedure. So how the article is applied depends on Part 2, which comes under the Majority Voting Procedure. This would allow member states in trouble, (in this case virtually all of them), to outvote member states opposed to paying for other members pensions.
[5] If we cast off the shackles of the EU we can start by reducing the burden to industry that EU regulation costs us. The government have set up a “Better Regulation Taskforce” who reported in 2005 that EU regulations cost UK industry £100 billion a year. That is nearly 10% of GDP; if we can strip out just one third of this cost from our economy then we can solve our pensions problems with this saving alone
The Institute of Directors in a paper published in 2002 put the cost of full integration and monetary union, included unfunded pension costs at £168 Billion! Using the example above made by The House Of Commons Select Committee, if we again translate this in terms of National Debt per man woman and child terms this means: - Current liability (Dec 2004) of £6,700 (You may notice that as a result of the miracle that Gordon Brown has worked with our economy the figure has increased 38% since 1996), adding in our unfounded pension liabilities the sum is £10,700. If we again apply the EU's unfounded liabilities and the cost of full membership, AND remember this is before the ten new countries joined adding the EU’s liabilities will mean a National Debt figure, per head of population of £69,000. But we cannot increase National Debt because of the constraints of the Growth & Stability Pact so our Chancellor, will have to cut spending or increase taxes to 60% of GDP.
[6] “Towards a citizen’s Pension” final report published September 2005 by the National Association of Pension funds. Analytical work carried out by the Pensions Policy Institute.
NAPF. NIOC House. 4 Victoria Street. London. SW1 0NX.
Available on line at: -
http://www.napf.co.uk/ or http://www.pensionspolicyinstitute.org.uk/
[7] We would go beyond the recommendation of the NAPF paper and include in the qualification period any service in the UK armed forces home or overseas, (this would also include units such as the Ghurkas), those who serve in our embassies abroad and any UK citizen working overseas for a recognised charity or mission.
[8] Under UKIP’s flat rate tax proposals, (which are beyond the scope of this Discussion Document), married people during their working lives will each receive a tax allowance of £10,000 which 50% can be transferred between them to the higher earner. Thus a married couple with only one breadwinner will have a tax free allowance of £15,000.
[9] During the transition period total State Pension payments will be the higher of £125 a week or accrued basic pension and secondary pension entitlement. In addition Pension Savings Credits already in payment will be maintained.
[10] The number of pensioners claiming Pension Credits are projected to rise to 10.5 million in 2030, 13.0 million in 2040 and 14 million in 2050.
[11] Table 1.
Number in the 60-64 age group who will be retiring in the following five years against those in the 15-19 age group who will be available to join workforce in the same period.
Figures in millions. Source: The Office of National Statistics.
Year
Cohort
Men
Women
Total
Net
Accum.
2010
60-64
1.80
1.90
3.70
15-19
2.00
1.90
3.90
+ 0.20
2015
60-64
1.75
1.75
3.50
15-19
1.90
1.75
3.65
+ 0.15
+ 0.35
2020
60-64
1.95
1.95
3.90
15-19
1.75
1.70
3.45
- 0.45
- 0.10
2025
60-64
2.25
2.25
4.50
15-19
1.65
1.60
3.25
- 1.25
- 1.35
2030
60-64
2.25
2.20
4.45
15-19
1.75
1.65
3.40
-1.05
- 2.40
2035
60-64
2.00
1.95
3.95
15-19
1.80
1.65
3.45
- 0.5
- 2.45
2040
60-64
1.85
1.80
3.65
15-19
1.75
1.70
3.45
- 0.20
- 2.65
2045
60-64
2.00
1.95
3.95
15-19
1.65
1.55
3.20
- 0.75
- 3.40
2050
60-64
2.10
2.10
4.20
15-19
1.65
1.55
3.20
- 1.00
- 4.40
[12] Table 2 Support Ratio.
Those between age 20 and 64 to support those 65 and over.
i.e. Potential workers per pensioner.
Figures in millions Source: The Office of National Statistics.
Year
20-44
45-64
20-64
65+
20-64/65+
2005
20.40
15.00
35.40
9.6
3.6875
2010
22.20
15.30
37.50
10.3
3.6407
2015
20.60
16.70
37.30
11.7
3.1880
2020
21.50
17.40
38.90
12.4
3.1371
2025
20.50
17.10
37.60
13.0
2.8923
2030
19.60
16.70
36.30
14.6
2.4863
2035
19.50
16.10
35.60
16.1
2.2112
2040
18.50
16.50
35.00
16.4
2.1341
2045
18.40
16.60
35.00
16.3
2.1472
2050
18.50
16.80
35.30
18.0
1.9611
[13] The total workforce, (those aged between 20 and SRA), in September 2005 was 35.40 million, of these 7.89 million where grouped as being ‘economically inactive’.
They were classified as follows: -
5.841 million were not seeking work.
· 1.856 million students.
· 2.287 million were looking after the home or family.
· 0.187 million were on short term sick benefit.
· 2.114 million were on long term sick or disability benefit.
· 28,000 were classified as ‘discouraged’. (?)
2.050 million were seeking employment.
(Source ONS).
Table 3. In Employment.
Figures in millions. EA= Economically Active. SRA = State Retirement Age.
Age
No
% EA
No Men
% EA
No Women
% EA
16 and over
28.798
60.2%
15.507
66.9%
13.291
53.9%
16- SRA
27.728
74.9%
15.144
79.9%
12.584
70.4
16-17
0.612
38.8%
0.292
36.2%
0.319
41.6%
18-24
3.508
65.4%
1.857
68.5%
1.651
62.3%
25-34
6.259
80.3%
3.413
88.3%
2.846
72.5%
35-49
10.938
82.7%
5.781
88.5%
5.157
77.0%
50-SRA
6.607
72.9%
3.934
75.1%
2.674
69.8%
SRA +
1.095
10.1%
0.373
9.2%
0.721
10.6%
Economic Activity
Age
No
% EA
No Men
% EA
No Women
% EA
16 and over
30.231
63.2%
16.356
70.5%
13.875
56.3%
16- SRA
29.136
78.7%
15.983
83.4%
13.154
73.6%
16-17
0.788
50.0%
0.395
48.9%
0.394
51.2%
18-24
3.939
73.5%
2.125
78.4%
1.814
68.4%
25-34
6.538
83.9%
3.570
92.3%
2.969
75.6%
35-49
11.264
85.1%
5.960
91.2%
5.303
79.2%
50-SRA
6.607
72.9%
3.934
75.1%
2.674
69.8%
SRA +
1.095
10.1%
0.373
9.2%
0.721
10.6%
[14] Tomorrow’s company. 235-241, Blackfriars Road. London. SE1 8NW. http://www.tomorrowscompany.com/.
“The Aging population, Pensions and Wealth Creation”, Page 9 :- “The main factor affecting our ability to afford an aging population without the erosion of living standards is the impact of rising productivity. More than anything else, rising productivity explains the paradox that aging societies have simultaneously become wealthier.”
ENDS.
Discussion Document 7
January 2006
The Lechlade Group is comprised of members of the UK Independence Party who aim to evolve UKIP from being perceived as a pressure group to a party with a broad range of policies acceptable to the electorate.
The group will be issuing a series of papers outlining their recommendations to achieve this aim.
Paper 7: PENSIONS – Crisis Or Opportunity?
The Interim report produced by The Pensions Commission under Sir Adair Turner [1] in October 2005 provided an excellent analysis of the state of UK pensions. In summary: -
The Perceived Problem according to Turner.
· People living longer, falling birth rate means there will be fewer workers to support pensioners.
Year 2005
2050
No of pensioners
9.6 Million
18 Million
Workers per pensioner
3.68
1.96
Solution Choices available.
· Increase government spending on pensions
· Encourage an increase in private pension contributions
· Increase the retirement age (as Turner report)
(Or a combination of any or all of the above solutions)
In this paper we will challenge these solution choices and offer an affordable and acceptable alternative for the people of Britain. We believe that the ‘pension crisis’ offers an opportunity to build a pensions system that is fit for the British economy in the 21st century.
THE £ECHLADE GROUP IS COMMITTED TO RETURNING THE GOVERNMENT OF BRITAIN TO THE BRITISH PEOPLE.
What has the government been doing to solve the problem?
· The introduction of the Stakeholder Pension.
Largely this scheme has been a failure (Less than 25% of Stakeholder schemes receive any form of contribution) and almost completely misses the target market.
· The simplification of company and personal pensions.
The Pensions Act 2004, in force from 6th April 2006 crystallises the many pension regimes into just two and as such is welcome.
· The Turner Report.
This recommends a staged increase in retirement age to 68 by 2050.
· The Pension Credit.
In effect a means tested top up to the basic state pension, which acts as a disincentive for people to save for retirement.
Any personal pension income is deducted from the top up thus unless a saver is able to contribute significantly into personal provision to lift them well above the Pension Credit level then there is no incentive for them to make any private provision. [2]
This affects the lower paid in particular.
· Increasing immigration of younger workers.
This is in line with the EU solution to maintain the balance between workers and pensioners. The Cass Business School has quantified the number of new workers needed to achieve this balance in the UK alone as being 10,000,000 by 2020. [3]
Clearly this is a short-term fix of the pyramid scheme variety. Those 10,000,000 workers will themselves become pensioners and need ever more new workers to support them in retirement. This is in addition to the infrastructure and support costs of mass immigration.
These are the wrong problems and the wrong Solutions.
They all act on short-term popularist policies. Pensions need a long-term solution and facing the truth about income in retirement will not be popular
The current government’s lack of true commitment to the problems facing us is reflected in the fact that in the eight years since they came to power in 1997 we have had fifteen different Pension Ministers.
A Further Concern………..
The funded pension provision in the big four EU economies is: - UK = 74.7%, Germany 5.8%, France 5.6%, Italy 3.0%
Worse still, whilst the UK’s unfunded liabilities amount to 20% of GDP the other three main EU economies all have pension deficits greater than 100% of GDP.
In March 2000 the Council of Ministers drew up the ‘Lisbon Agenda’ of targets to be met by 2010 to solve their pension problems: -
· An annual growth rate of 3% in GDP for ten years
· To achieve full employment
– with an interim target of 70% employment by 2010
· To raise the numbers of women in employment from 51% to 60%
As of 2006 no progress at all has been made to achieving any of these targets and only the UK has exceeded these figures, (apart from GDP growth this last year).
In 1996 the House Of Commons Select Social Security Committee on “Unfunded Pension Liabilities in the EU” stated; “The UK’s current National Debt is equivalent to about £5,000 for every man woman and child in the country. If we add on the burden of our unfunded pension liabilities the sum would increase to approx £9,000 per person. If we make a further addition for the liabilities of unfunded pensions in the rest of the EU then the per capita figure for the National Debt would exceed £30,000. The adoption of a single currency would entail the adoption of a single balance sheet, but the extent of unfunded pension liabilities in certain of our partner countries casts serious doubt upon the long term sustainability of their finances” [4]
Make no mistake; the EU pension liabilities are a problem for the UK if we stay on course to become part of a ‘federal’ single currency Europe. [5]
Solving the problem - Part One: The Citizens Pension
We need to be honest with the nation by making it absolutely clear that the state pension will be what it started out as in 1908:-
AN ABSOLUTE GUARANTEE AGAINST ABSOLUTE POVERTY.
Nothing else. The State Pension will provide for life’s bare essentials. Anything above the basics it is up to the individual to make provision based on their choice of what lifestyle they want in retirement.
In September 2005 The Pensions Policy Institute produced a report [6], which recommended affordable reforms to the State Pension system.
In essence, State Pensions based on National Insurance contributions would be replaced to one based on residence, funded by scrapping ‘Contracting Out’ and diverting the SERPS Rebate to fund these new ‘Citizens Pensions’.
After a transitional period the existing state pension; the earnings related Secondary Pension, (Graduated Benefit, SERPS and SP2), and means tested Pension Credit system will be replaced by the flat rate ‘Citizens Pension’.
Qualifying for a Citizen’s Pension.
There will only be two criteria, length of residence in the UK and at what age the pension will be payable.
The criteria will be twenty years residence in the UK, 5 of those years in the last 10. [7]. Thus women who have taken time out to bring up a family or look after elderly parents will not be disadvantaged.
Level of payment of the Citizen’s Pension.
The indexation of pensions to National Average Earnings, rather than RPI, will be restored.
We intend to start the Citizens Pension at £125 a week, which is the existing Savings Credit level and a figure that the government regard as the ‘poverty line’.
Married couples will receive 150% of the single persons rate and pensioners living with others, shared accommodation, sheltered housing or same sex relationships will receive 90% of the flat rate.
This may appear to disadvantage those that are married, however, changes propose making to income tax will more than compensate this. [8]. It may also be argued that an enhanced flat rate pension gives an advantage to higher earners. However under the current regime, those with higher lifetime earnings ready accrue a higher pension because the Secondary Pension Schemes are earnings related. This advantage will be removed.
The Citizens Pension is thus more beneficial for those with lower or indeed no lifetime earnings. The disincentive to save for retirement that exists under the current means tested regime is eradicated. This is an encouragement to all, especially the better paid, to make their own additional provision to maintain the lifestyle that they want in retirement.
Cost of the Citizen’s Pension.
If the scheme begins on the 6th April 2010 (the earliest it could be implemented) then the cost to the taxpayer that year would be £32 billion.
During the transition period, [9], there are savings of £12 billion on this figure. Ending contracting out rebates will save £11 Billion; Scrapping the Pension Credit system saves an additional £11 billion.
Thus the net cost is a saving of £1 billion.
The increased pension will give pensioners more to spend and it is estimated that this will produce an additional £2 billion in tax revenues however, this amount will be absorbed by the transitional costs of maintaining existing Savings Credits during the transitional period.
There are also savings to be made in the reduced administration costs of a flat rate Citizens Pension in the region of £5 billion a year, however we are not taking these into account as these will be balanced initially by the transitional costs.
The current projected cost of the State Pension in 2050 is 5.7% of GDP, however, at the moment only 70% to 80% of those who are eligible claim the Pension Credit. [10]. With the State Pension reducing in relation to NAE, it is expected that there will be a greater take up in the future so the total cost can be expected to increase by up to 7.5% of GDP; the NAPF paper suggests a median figure of 6.6% of GDP be used.
The cost of the Citizens Pension by 2050 will be 9.2% of GDP. This is an additional 2.6% i.e. £30 billion. How this cost will be met is explained following.
Solving the Problem - Part Two : The Productivity solution to an aging population.
The traditional approach to quantifying the pension problem has always been to calculate the number of people in the available workforce needed to support each pensioner and thus calculate the amount each would have to pay in tax and NI to provide those pensions.
Current projections are that by 2050 there will be 4.4 million fewer workers, [11], to provide for an additional 8.4 million pensioners, [12].
This is the argument that has prompted the European Union to adopt a policy of increasing the immigration of young workers from outside the EU.
However, what these figures don’t take into account are the population who have not yet entered the workforce who also have to be supported by them.
Nor does it include those of working age who are classified as ‘ not being economically active. [13]
Taking these into account gives a true figure for 2005 - 27.5 million actual workers are supporting 31.8 million non workers. i.e. each worker supports 1.16 non-workers.
If we can create productive jobs by expanding the economy to employ many of the economically inactive then the number of workers will become 29.5 million to support 29.8 million non-workers, a support ratio of 1.01.
Further economic improvements such as equalisation of the retirement age (to be implemented anyway in 2010) and increasing the economic activity rate (EAR) of those aged between 60 and 65 to the same as that of younger workers increases the support ratio to 0.94 per worker.
We accept that this would effectively mean full employment, which is too idealistic, but we have used these calculations to show how small improvements can make a significant difference.
Tomorrow’s Company in their paper “The Aging population, Pensions and Wealth Creation”, [14], argue that the workers also produce for their own consumption and thus support themselves. They therefore calculate the support ratio in 2003 to be 0.48 falling to 0.45 in 2041 – about the same as it was in 1961 before the ‘baby boomers’ started entering the workforce.
Their prognosis, like ours, is that we can afford decent pensions if we get genuine growth in the economy. What is required is: -
· To have a strong corporate sector of companies of all sizes that are globally competitive.
· To continue to be an attractive choice for foreign direct investment for world class companies with world class research facilities in such fields as biotechnology, nanotechnology, new sources of energy and other horizon industries.
· A quality of education at every level from pre-school to the universities, which matches the highest international standards.
· Greater emphasis on skills training.
· Hi-tech business start-ups and more of these developing into major companies.
· A much improved national transport infrastructure and the adoption of modern telecommunications technologies.
· More long term investment projects.
What we absolutely do not need is the cost of more new workers – what we do need is the creation of more jobs and increasing the productivity levels of those in work BUT we cannot implement these needed strategies whilst we continue to be part of the European Union and subject to a centralised pan-european plan that best serves the EU and not the requirements of the UK.
Outside of the European Union the UK, the World’s fourth biggest economy, can set a course to pay it’s citizens a decent pension.
Inside the EU we will be dragged down by their pension burdens and a declining economy.
The Lechlade Group. January 2005.
The Lechlade Group can be contacted through:-
David Lamb. 5 Marfleet Close. Lower Earley. Reading. Berks. RG6 3XL.
Lechlade@thebrainsugery.co.uk
Appendix:
[1] Turner report executive summary :-
http://www.pensionscommission.org.uk/publications/2004
Full report: -
http://www.pensionscommission.org.uk/publications/2005
[2] To purchase the equivalent of the Pension Credit would require a 35 year old to save £76.00 a month, (Using 7% growth rates and 3% average inflation), in a personal pension.
Thus unless a saver is able to contribute significantly more than this into personal provision to lift them well above the Pension Credit level then there is no incentive for them to make any private provision.
[ 3 ] http://www.cass.city.ac.uk/media/stories/story_13_45816_43477.html
Cass Business School. 106 Bunhill Row. London. EC1Y 8TZ.
[ 4 ] House of Commons Select Committee, “Unfunded Pension Liabilities 1996”.
“As the UK's outstanding public pension liabilities are substantially below those of other EU members, There would be a risk that if the UK joined a single currency British Taxpayers could be called upon to help finance the ‘pay as you go’ pension obligations of the EMU members, or suffer the consequences of being tied to interest rates on the single currency that were forced upwards by the market pressures of financing certain countries’ inherited pension commitments” The Treaty of Maastricht states that no country can be forced to bail out another. However, if we have tax harmonisation – and if we have full integration we have to have tax harmonisation as to allow otherwise would give one country a competitive edge over the others – then those tax rates will be set to take into account the unfunded pension liabilities of the rest of the EU.
However, there is a separate clause, which can be used to bail out member states in trouble. In the Treaty of Nice this article was brought under the Majority Voting Procedure. Article 100(20 TEC: - “ Where a member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council may, acting by a qualified majority on a proposal from the Commission, grant under certain conditions, community financial assistance to the Member State concerned” Secondly, the so called “no bail out clause” itself contains a bail out loophole: - “Article 103 TEC, Part 1)“The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments etc, (as above), of another Member State, without prejudice to mutual etc, (as above). Part 2): If necessary, The Council, acting in accordance with the procedure referred to in Article 252, may specify definitions for the application of the prohibitions referred to in Article 101 and in this Article.” When Part 2 refers to Article 252, this means the Qualified Majority Voting Procedure. So how the article is applied depends on Part 2, which comes under the Majority Voting Procedure. This would allow member states in trouble, (in this case virtually all of them), to outvote member states opposed to paying for other members pensions.
[5] If we cast off the shackles of the EU we can start by reducing the burden to industry that EU regulation costs us. The government have set up a “Better Regulation Taskforce” who reported in 2005 that EU regulations cost UK industry £100 billion a year. That is nearly 10% of GDP; if we can strip out just one third of this cost from our economy then we can solve our pensions problems with this saving alone
The Institute of Directors in a paper published in 2002 put the cost of full integration and monetary union, included unfunded pension costs at £168 Billion! Using the example above made by The House Of Commons Select Committee, if we again translate this in terms of National Debt per man woman and child terms this means: - Current liability (Dec 2004) of £6,700 (You may notice that as a result of the miracle that Gordon Brown has worked with our economy the figure has increased 38% since 1996), adding in our unfounded pension liabilities the sum is £10,700. If we again apply the EU's unfounded liabilities and the cost of full membership, AND remember this is before the ten new countries joined adding the EU’s liabilities will mean a National Debt figure, per head of population of £69,000. But we cannot increase National Debt because of the constraints of the Growth & Stability Pact so our Chancellor, will have to cut spending or increase taxes to 60% of GDP.
[6] “Towards a citizen’s Pension” final report published September 2005 by the National Association of Pension funds. Analytical work carried out by the Pensions Policy Institute.
NAPF. NIOC House. 4 Victoria Street. London. SW1 0NX.
Available on line at: -
http://www.napf.co.uk/ or http://www.pensionspolicyinstitute.org.uk/
[7] We would go beyond the recommendation of the NAPF paper and include in the qualification period any service in the UK armed forces home or overseas, (this would also include units such as the Ghurkas), those who serve in our embassies abroad and any UK citizen working overseas for a recognised charity or mission.
[8] Under UKIP’s flat rate tax proposals, (which are beyond the scope of this Discussion Document), married people during their working lives will each receive a tax allowance of £10,000 which 50% can be transferred between them to the higher earner. Thus a married couple with only one breadwinner will have a tax free allowance of £15,000.
[9] During the transition period total State Pension payments will be the higher of £125 a week or accrued basic pension and secondary pension entitlement. In addition Pension Savings Credits already in payment will be maintained.
[10] The number of pensioners claiming Pension Credits are projected to rise to 10.5 million in 2030, 13.0 million in 2040 and 14 million in 2050.
[11] Table 1.
Number in the 60-64 age group who will be retiring in the following five years against those in the 15-19 age group who will be available to join workforce in the same period.
Figures in millions. Source: The Office of National Statistics.
Year
Cohort
Men
Women
Total
Net
Accum.
2010
60-64
1.80
1.90
3.70
15-19
2.00
1.90
3.90
+ 0.20
2015
60-64
1.75
1.75
3.50
15-19
1.90
1.75
3.65
+ 0.15
+ 0.35
2020
60-64
1.95
1.95
3.90
15-19
1.75
1.70
3.45
- 0.45
- 0.10
2025
60-64
2.25
2.25
4.50
15-19
1.65
1.60
3.25
- 1.25
- 1.35
2030
60-64
2.25
2.20
4.45
15-19
1.75
1.65
3.40
-1.05
- 2.40
2035
60-64
2.00
1.95
3.95
15-19
1.80
1.65
3.45
- 0.5
- 2.45
2040
60-64
1.85
1.80
3.65
15-19
1.75
1.70
3.45
- 0.20
- 2.65
2045
60-64
2.00
1.95
3.95
15-19
1.65
1.55
3.20
- 0.75
- 3.40
2050
60-64
2.10
2.10
4.20
15-19
1.65
1.55
3.20
- 1.00
- 4.40
[12] Table 2 Support Ratio.
Those between age 20 and 64 to support those 65 and over.
i.e. Potential workers per pensioner.
Figures in millions Source: The Office of National Statistics.
Year
20-44
45-64
20-64
65+
20-64/65+
2005
20.40
15.00
35.40
9.6
3.6875
2010
22.20
15.30
37.50
10.3
3.6407
2015
20.60
16.70
37.30
11.7
3.1880
2020
21.50
17.40
38.90
12.4
3.1371
2025
20.50
17.10
37.60
13.0
2.8923
2030
19.60
16.70
36.30
14.6
2.4863
2035
19.50
16.10
35.60
16.1
2.2112
2040
18.50
16.50
35.00
16.4
2.1341
2045
18.40
16.60
35.00
16.3
2.1472
2050
18.50
16.80
35.30
18.0
1.9611
[13] The total workforce, (those aged between 20 and SRA), in September 2005 was 35.40 million, of these 7.89 million where grouped as being ‘economically inactive’.
They were classified as follows: -
5.841 million were not seeking work.
· 1.856 million students.
· 2.287 million were looking after the home or family.
· 0.187 million were on short term sick benefit.
· 2.114 million were on long term sick or disability benefit.
· 28,000 were classified as ‘discouraged’. (?)
2.050 million were seeking employment.
(Source ONS).
Table 3. In Employment.
Figures in millions. EA= Economically Active. SRA = State Retirement Age.
Age
No
% EA
No Men
% EA
No Women
% EA
16 and over
28.798
60.2%
15.507
66.9%
13.291
53.9%
16- SRA
27.728
74.9%
15.144
79.9%
12.584
70.4
16-17
0.612
38.8%
0.292
36.2%
0.319
41.6%
18-24
3.508
65.4%
1.857
68.5%
1.651
62.3%
25-34
6.259
80.3%
3.413
88.3%
2.846
72.5%
35-49
10.938
82.7%
5.781
88.5%
5.157
77.0%
50-SRA
6.607
72.9%
3.934
75.1%
2.674
69.8%
SRA +
1.095
10.1%
0.373
9.2%
0.721
10.6%
Economic Activity
Age
No
% EA
No Men
% EA
No Women
% EA
16 and over
30.231
63.2%
16.356
70.5%
13.875
56.3%
16- SRA
29.136
78.7%
15.983
83.4%
13.154
73.6%
16-17
0.788
50.0%
0.395
48.9%
0.394
51.2%
18-24
3.939
73.5%
2.125
78.4%
1.814
68.4%
25-34
6.538
83.9%
3.570
92.3%
2.969
75.6%
35-49
11.264
85.1%
5.960
91.2%
5.303
79.2%
50-SRA
6.607
72.9%
3.934
75.1%
2.674
69.8%
SRA +
1.095
10.1%
0.373
9.2%
0.721
10.6%
[14] Tomorrow’s company. 235-241, Blackfriars Road. London. SE1 8NW. http://www.tomorrowscompany.com/.
“The Aging population, Pensions and Wealth Creation”, Page 9 :- “The main factor affecting our ability to afford an aging population without the erosion of living standards is the impact of rising productivity. More than anything else, rising productivity explains the paradox that aging societies have simultaneously become wealthier.”
ENDS.
posted by David Lamb @ 2:56 AM
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