'The cheque's in the post' and 'We're from head office...we're here to help you', were always the two favourite business lies. There's now a third. 'The government has decided to tackle the pensions crisis'
‘Crisis’ was always an exaggeration built out of a number called the ‘age
support ratio’ – numbers of old in proportion to those working to support them.
In fact, the important figure was the total support ratio – the number of people
working and adding value who were needed to support those not doing so for
reasons of age, education or anything else.
The recommendations of Lord Turner’s Pensions Commission were constructed on
this false foundation. To make things worse, Turner then proposed a National
Pensions Savings Scheme. He did not intend NPSS to be a deception, but
government policy has made it so.
There are two reasons. The first is means-testing. Turner failed to persuade
the government to make enough change to means-testing. There will be a continued
reduction in the level of the basic state pension relative to average earnings
until 2012. This level of earnings will then be index-linked. But for people who
have saved out of taxed income, the marginal tax rate on their extra income is
likely to average 50% and it could be 100% in some cases!
The answer to a savings-hostile regime is to make savings attractive, not
unattractive but semi-compulsory.
The second problem is the effect on employer generosity. If you introduce a
floor, over time it becomes the ceiling. Soon, every employer must contribute 3%
towards an individual’s pension saving. Next time the chancellor increases
employers’ national insurance contributions, those who have been more generous
end their generosity.
The NPSS will do little for pension income – probably contributing the
equivalent of only 0.7% of GDP to pensioner income by 2050. This is less than
the equivalent financial effect for pensioners of a one-year rise in the age of
retirement, i.e. 0.9%. It will only reduce state expenditure on pensioners by
0.1%.
Retiring people on low incomes who are enrolled into the NPSS can expect,
relative to today’s retirees, to see a change in the source of their retirement
income. But they will be worse off during their working lives because of
contributing 4% of their earnings into the scheme.
NPSS is an accident waiting to happen. The government has been warned.
Mark Goyder is director of Tomorrow’s Company