Solving the pension conundrum: an age-old problem

Transcription

1 204 Solving the pension conundrum: an age-old problem Michael Hill (2007) Pensions: Policy and politics in the twentyfirst century The Policy Press 200 pp Paperback: ISBN Robin Blackburn (2006) Age shock: How finance is failing us Verso 336 pp Hardcover: ISBN These publications offer two distinct approaches to the pensions debate. Michael Hill s Pensions follows a traditional social policy stance and provides a clear and concise introduction to the key themes underpinning current pension proposals in a selected number of Organisation for Economic Cooperation and Development (OECD) nations. In contrast, Robin Blackburn s Age shock takes an explicitly political economy approach. He focuses on failures in the financial system and proposes a solution to the UK s pension dilemma. Although this is an interesting and lively read, those without some knowledge of economics or understanding of the operation of the pension system will probably find it beneficial to read the volume by Hill before tackling Blackburn s book. Both texts are highly topical and will help to keep the debate on pensions alive at a time when the government believes they have solved the pension conundrum through the proposed introduction of personal accounts (DWP, 2006). The Labour government has acknowledged that... approximately 7 million people are not saving enough to give them retirement incomes they are likely to consider adequate [and that] Personal Accounts will extend the benefits of private pension saving to those on moderate to low incomes who do not have access to a good employer pension scheme. (DWP, 2006, p 47) It is hoped that the introduction of auto-enrolment via the payroll will ensure that this scheme is more robust than previous initiatives. Personal accounts will be underpinned by an upgraded basic state pension (BSP). This continued reliance on

2 205 private sector provision for those on low income supported by a modest increase in state provision has been criticised as an opportunity missed, not least because reliance on means testing will remain significant. Accordingly, critics have argued that personal accounts simply do not go far enough (PPI, 2006; Pension Reform Group, 2006; and Lynes, 2006). Both Hill and Blackburn concur with this assessment, adding to the growing list of commentators calling for enhanced state provision. Michael Hill s book starts from a historical perspective, identifying how the development of a nation s pension system governs the pathway contemporary policy will take. For example, he emphasises how private provision in the UK has, unlike in Germany, had a significant role in reducing the influence of the state insurance scheme. Although social insurance received a significant boost in the 1970s when Labour introduced the state earnings related pension scheme (SERPS) this did not result in any significant diminution in private provision. Indeed, the continued dominance of the latter enabled subsequent Conservative governments to introduce their personal pension scheme (PP) to replace unaffordable state provision. This formed part of a neoliberal welfare agenda that aimed to reduce state spending and, via subtle policy changes, decrease the value of both SERPS and the BSP. When Labour returned to government in 1997 they continued along a privatised route despite acknowledging the limitations of such provision in terms of adequacy (PP) and coverage (Occupational Pension Schemes [OPS]). They did, however, introduce a means-tested benefit (now known as Pension Credit) to ease the position of the poorest pensioners. Hill notes that pensioner income in the UK is now at an all time high in relation to average income. However, he points out that this hides the disparity between those reliant on the state and those with significant private provision. For example, in an analysis of OECD data, he demonstrates that the poorest UK citizens displayed high income replacement rates but, unlike many of their European Union counterparts, the position deteriorated significantly for those on average earnings, whereas higherincome earners were able to rely on private provision. According to Hill, the decline of defined benefit (DB) OPS will only accelerate this trend in the near future. Moreover, he states that the mix between private and public provision has created an ideological fault line. On one side of the divide are those who view pensions as instruments of economic policy that is, holding back returns from labour market participation. The other side sees pensions as a means of providing adequate incomes for all. Hill also examines a key claim underpinning New Labour s approach to extend privatised provision. This is the belief that an ageing population will create a demographic time-bomb in which current levels of state spending on pensions in the future will be unsustainable. While acknowledging the importance of the so-called demographic time-bomb he contends that this has been exaggerated to justify privatisation of the pension system. Importantly, the theory is criticised as being a simplistic delineation of age and ignores the real issue, namely labour force participation. Moreover, the obsession with funded private sector pensions misses a key point, namely that they are equally

3 206 affected by an ageing society. Thus it is an illusion that such schemes explicitly secure pensions against social and economic change. A key concern is that funded private pensions are organised in an individualistic way (although Blackburn argues that this can be addressed), thus destroying the intergenerational support implicit in the pay as you go (PAYG) social insurance schemes. Hill thus points out that systems that are progressive and not socially divisive tend to support the continued use of PAYG, but owing to the pathway adopted in the UK there is no obvious easy route out. Labour s new proposals are an example of their failure to significantly raise the BSP to an adequate level. As Hill notes, the White paper, Security in retirement: towards a new pension system, was regarded as a clever exercise in trying to persuade people that something generous has been done when in truth it has not (see p 165). Despite this, Hill concludes that there is scope for change. The attempts to raise the BSP could be brought forward and its value up-rated to the level it would have been had reductions not been introduced. But the cost of state provision will remain a political issue, though removal of the regressive tax relief on private contributions would increase resources for the state pension. Robin Blackburn s Age shock, with its political economy stance, as above noted, tackles the pension debate head on, uncovering the skulduggeries currently used by financial managers in the private sector to hive off pension contributions for their own gain. Importantly, he demonstrates how tax avoidance measures are extremely costly for the state. Whereas an advocate of a traditional social policy approach could be criticised and disregarded by policy makers for not understanding or explaining the economic cost of pension policy, such criticism cannot be levelled at Blackburn, who is able to mount an informed attack on the neoliberal agenda pursued by the current government. He makes it clear that there is an alternative model that can harness the financial sector for future economic growth. From the outset Blackburn accepts that future demographic changes will increase the numbers dependent on those in work, but this should be regarded as a common shock, not a risk. Indeed, he contends what is required is a renewed welfare principle based on collective insurance and a larger collective reserve. Blackburn states that the neoliberal policy direction, via financialisation 1 is flawed. Taxation has lost out to financialisation and public interests have lost out to private ones. He also argues that there is too much surplus in private hands, which undermines the rising need for public investment and safety reserves. Moreover, he contends that a buoyant economy with some reserves and with efficient pensions and medical provisions for all will meet the challenge of an ageing society. However, current government proposals are 6% of gross domestic product (GDP) below future pension needs. In the past, Labour was concerned that benefits that targeted the poor would become poor benefits. The current drift to means testing will replicate this. Today we have a divided welfare system, in which public pensions provision is in direct competition with private pensions. Welfare spending has become stigmatised at a time when public subsidies, via tax relief, underpin a thriving commercial and private pensions industry. Recently the private sector has come under attack for its notable failure to fill the void left by the declining state pension. This has been exacerbated by the shift

4 207 from private DB schemes to defined contribution (DC) schemes, which has shifted the risk onto the individual. Moreover, in DC schemes employer contributions have halved. Importantly, even secure DB schemes have failed to meet their promised payouts as companies have closed or been downgraded as vulture capitalists free companies of their pension responsibilities. Blackburn explains in great detail how private equity has destroyed private pensions for many workers, while chief executive officers in companies, whether successful or not, walk away with considerable benefits for work done. Furthermore, Blackburn documents how vulture capitalism, hedge funding and corporate tax evasion conspires against the individual investor. Blackburn proposes to avoid this situation by means of increased financial regulation via the use of a share levy, thereby reducing investor alienation. This idea is based on the Swedish Rehn-Meidner model (see Milner, 2001). The share levy approach would make large corporations issue shares based on 20% of annual profit, which would be used to generate future income for at least 27 years. This would restore employer contributions, which have fallen since the change from DB to DC OPS schemes, and prevent tax avoidance. A share issue does not subtract from corporate cash flow, so it should not jeopardise investment nor threaten employment. A compulsory share levy would supply a stream of assets which would generate income needed to pay for pensions. In addition to this, Blackburn argues that some of these funds should be used for social investment. Importantly, the collective nature of the share levy scheme, which would provide a universal second tier pension, would break the direct link between employer and employee, thereby decreasing risks involved with company closures. All contributors would have a share of the overall fund and this would give them more say on how these funds are invested, namely improving social investment responsibility. Blackburn calculates that the share levy could address half the predicted GDP funding gap and supply 30% of median income to all investors. The scheme would be universal, protecting those with incomplete working patterns and/or those undertaking caring roles. The share levy would be underpinned by a universal PAYG BSP, which would ensure 40% to 50% of median income to all. Blackburn argues that current proposals fall far short in meeting future demands and will fail to address the predicted age shock. His proposal is one way of tackling the ageing society, although he acknowledges that it may be regarded as an ambitious approach. Although his proposal is far from a radical anti-capitalist perspective, he anticipates that it will provoke stiff opposition from vested interests. This brings us neatly back to Hill s opening chapter, which recognises the importance of how pension pathways are governed by history. Both authors agree that there are doubts as to whether the current government will confront the problem head on. Certainly, New Labour s proposals are some distance away from Blackburn s recommendations for tackling the finance industry. Any moves the government took along the Blackburn route would almost certainly be regarded as evidence of a return to the socialisation of capital, despite its moderate ambitions. As such there seems little prospect that Blackburn s proposal will be adopted. We are likely, therefore, to see a continuation

5 208 of policies that tinker at the edges but leave major issues unresolved. Nevertheless it remains important that academics such as Blackburn and Hill confront current thinking as the future pension problems will not be resolved if we continue along the current pathway. Note 1 Financialisation refers to the growing and systemic power of finance and finance engineering in all spheres of life. References DWP (Department for Work and Pensions) (2006) Personal accounts: A new way to save, Cm 6975, London: The Stationery Office. Lynes, T. (2006) Memorandum submitted to the UK Parliament, 30 March, Select Committee on Work and Pensions: Written evidence, ( uk/pa/cm200506/cmselect/cmworpen/1068/1068we69.htm). Milner, H. (ed) (2001) Gosta Rehn, the Swedish Model and labour market policies: International and national perspectives, Aldershot: Ashgate. Pensions Reform Group (2006) Developing alternative approaches to a national pensions saving scheme ( Marcus Whiting* Institute of Applied Social Studies University of Birmingham m.whiting@bham.ac.uk * The author is an ESRC Postdoctoral Research Fellow (award no PTA )