Pensions blame

With the promised departure of The Liar, his widely-expected successor Gordon Brown is naturally coming under sustained attack from his political opponents. The latest row concerns the 1997 budget, when he removed a substantial tax concession from pension funds. In the years that followed, we had a crisis in the pensions industry with a high-profile casualty and some realignment of pensions in general.

Now it’s taken for granted that this is a Bad Thing, and that blame is due. But that’s not really the whole story. You could very legitimately describe the crisis as a necessary damage limitation exercise. Because if it hadn’t happened, the pensions bubble could have continued to grow for another ten or twenty years, leading to an eventual catastrophic collapse an order of magnitude bigger than what we actually had.

It’s fundamentally a numbers game dictated by demographics. As the number of pensioners grows, so does the cost of providing for them, even if pensions per person actually shrink. A savings pot accumulated over one’s working life works fine when it’s only a few who have it, but when you try to extend that to everyone, you’re up against a more fundamental problem of supply and demand. No matter how much money the pensioners have saved, you need working people to supply their needs. And only so much of the economy can be devoted to pensioners without collapse in the rest of it.

So the basic scam was the promise heavily marketed to us in the 1980s. It was doomed from the start. I declined to invest in it, because I thought it blindingly obvious that the system then in operation could not last through to my retirement. No, I didn’t predict how 1980s-style pensions would collapse; just that it would inevitably happen. My generation will not enjoy the generous pensions of our elders, because there are simply too many of us. My own expectation is that I’ll go on working for as long as my health allows it.

Gordon would deserve credit rather than blame for deflating that bubble. Except for the side-effect of the country’s bubble-money being diverted into the property market, which still offers huge tax breaks to the rich.

Posted on April 3, 2007, in politics, uk. Bookmark the permalink. 3 Comments.

  1. “you need working people to supply their needs.”
    Your assumption that there would be none is extremely blinkered.
    Immigrants are already filling the gap. It is only prejudice against them that stops them becoming a fully effective solution to the problem you postulate.
    Gordon Brown was wrong. Full stop.

  2. Phil – nope.

    The situation with immigrants is transient. It works because the immigrants are prepared to put up with conditions that natives won’t stand for. But immigrants grow old too, and their children *do* expect the same rights as natives.

    The large differential between UK and Polish wages is unlikely to be permanent, either.

  3. A major issue for the UK is that we spend too much and save too little. We need some incentives to encourage people to save as this provides capital investment for industry and helps people to become more self-sufficient in old age. Regrettably, Gordon’s action led to pensions (which are, in essence, a tax-efficient but restrictive form of saving) become rather less attractive. This will lead to problems for all of us in future. Of course the few lucky enough to be on “final salary” pension arrangements will be relatively unscathed, but those with “defined benefit” pensions, based on the value of their retirement fund when they draw it down, will be greatly disadvantaged. Most of those now opting out of pensions altogether will, in all likelihood, become benefit claimants one day at considerably greater cost to the remaining taxpayers than would have been the case if saving for retirement was made more attractive.

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