by D.J. Webb
Until comparatively recently in this country, it was the assumption of most working-class people that the state would provide for their old age, and this assumption holds true insofar as the welfare state remains in place, although such provision as exists is far from lavish. The worst aspect of the welfare state is that everyone on the PAYE system has been taught that pensions are an entitlement: they have “paid in” for their pension through payment of taxes (including national insurance). Leaving aside the fact that many do not pay anything in, leading a life on welfare, the taxes low-income people pay do not cover the panoply of benefits they receive (pensions, education, healthcare, housing and much else), and as there is no investment of national insurance contributions in a sovereign wealth fund—as Nye Bevan said, “the great secret about the National Insurance fund is that there ain’t no fund”—nothing paid in has been accumulated anywhere to finance anyone’s retirement.
The system as it exists in the UK is that national insurance contributions are used to finance current government expenditure, including contributions to the EU, military adventurism abroad, foreign aid, drumming classes for civil servants, lifestyle coaches for town hall grandees and everything else. When we retire, we hope that taxation and national insurance inflows then will pay us decent pensions we have “paid in” for. The state pension is supplemented by whatever other provision we have in place: nearly all public-sector workers (94% in 2008) have publicly financed personal pensions to supplement the state retirement pension, and while there are such schemes in the private sector, the percentage of private-sector workers covered has fallen to the lowest level since the 1950s (11% in 2008).
The fact is that the private sector finances all state expenditure. A private-sector worker earning £30,000 a year takes home £22,762.36. The other £7,237.64 is tax and national insurance, with an additional £3,164.06 in employers’ national insurance contributions. In other words, for every worker earning £30,000, the employer forks out £33,164.06 and the state makes £10,401.70. By contrast, although public-sector workers are formally taxed, the money they are taxed on comes from the public purse in the first place. It is merely an accounting detail whether a public-sector worker is paid £30,000 and then taxed, or whether public-sector pay is paid net, in this case at £22,762.36, with no deductions. Public-sector workers do not contribute anything to public expenditure. What this means is that private-sector workers, many of whom do not have any personal pension provision in place, are financing, not only public-sector salaries, but also the pension contributions made to build up pension funds for public-sector workers. But if the state retirement pension is deemed good enough for low-income private-sector workers, who do indeed “pay in” to the system, why is it deemed unacceptable for public-sector workers, some of whose pensions are as high as £200,000 a year? The system seems entirely fraudulent.
I would like to see pensions as an entitlement done away with completely, and replaced by income support (a benefit not an entitlement) for pensioners without sufficient funds. Quite simply, everyone should be expected to build up funds for his own retirement, with a meagre safety net for those without. The key to it is a reform of national insurance. Rather than fund extraneous state spending, national insurance should be paid into one’s own Self Invested Personal Pension (SIPP). It would be a mandatory savings vehicle similar to schemes in Hong Kong and elsewhere and would ensure everyone had some provision. Let us say 10% of income was paid directly into a nominated SIPP, replacing all national insurance employee contributions, with the self-employed required to show they too were paying into their SIPPs. There would be no state funding of public-sector pensions. All public-sector workers would pay, from their existing salaries, into their SIPPs in lieu of what they currently pay, or appear to pay as an accounting trick, in national insurance. All company pensions would be moved over into SIPPs. There would be no implicit pension debt, whether corporate or state, although the state would be responsible for, hopefully, a declining proportion of individuals who, come retirement, still did not have adequate incomes.
While it is true that most people would be bewildered at the variety of investment choices available, banks could offer structured low-risk, medium-risk and higher-risk packages for the individuals concerned to choose from. Companies who chose to help employees garner better pension funding could pay additional funds into their employees’ SIPPs if they wished too. SIPP account management fees and the length of time transfers between SIPP funds took could be regulated by Act of Parliament. This way national insurance contributions would not disappear into a black hole of state spending on wasteful items. We would all be paying as much as before, but building up assets to back our retirements, and also increasing investment liquidity in UK and global capital markets
National insurance contributions collected in 2010/11 came to £96.5bn. Most of this is accounted for by employers’ national insurance, as employers pay NI at a higher rate than their employees and pay it on the whole of their employees’ incomes. While employers’ contributions should be scrapped too, assuming a gradual reduction in the state to be more consistent with an expanding economy, it would be possible to implement the scheme outlined above by making around £40bn in savings in public expenditure. Some of this could be funded by ending pension contributions by all public-sector bodies (£13.5bn a year) and by ending public contributions into the pensions of existing public-sector retirees (people already retired) whose public-sector pension plans are unfunded (£25bn a year, of which £20.7bn from contributions by employers and existing employees and £4.5bn from the Treasury top-up; these figures are found at http://www.public-sector-pensions-commission.org.uk/wp-content/themes/pspc/images/Public-Sector-Pensions-Commission-Report.pdf). These two figures apparently contain some overlap, but will nevertheless meet the majority of the cost of moving to the financing system I am proposing. In particular, these measures would ensure more equitable distribution of pension finance, which is currently skewed, to an extreme extent, to public-sector employees. This would entail depriving existing public-sector retirees on unfunded plans of anything other than the state retirement pension—but that is exactly what the private-sector employees, 89% without personal pension provision, are expected to live on.
Finally, the beauty of the system as outlined above is that it addresses the problem that most people can’t afford to invest in pensions. Given that tax and national insurance is a first charge, a mortgage, on our incomes, not everyone can pay tax and national insurance and still have enough left over to invest in retirement planning. By shifting existing NI contributions into their own dedicated SIPPs this problem is addressed. The current system is a con, and supported by many vested interests, who must be faced down as soon as possible.