Reforming the State pension

This looks good:

The changes, which are due to be detailed in a green paper by the end of the year, mean a single person could receive £7,280 a year and a couple £14,560.

Ministers believe that removing means testing and the resulting reduction in bureaucracy will save around £6bn a year. They believe a single-tier system would also reduce reliance on benefits.

The changes are likely to benefit married couples and stay-at-home mothers the most, as the latter often fail to qualify for the full basic pension because they have taken time out from work and have not built up enough national insurance contributions.

Having a (lowish) State pension topped up by means tested benefits means deterring people from saving for their own pension. If what you manage to save is simply going to be knocked off your extra means tested payment, why save?

But much more importantly for the long term, by decoupling the pension eligibility from national insurance contributions over the years they remove the last major barrier to abolishing national insurance.

No, of course this won\’t mean that what is snaffled from paycheques in NI payments (two of them remember, amounting to some 25% in total of wages between, what is it, £70 off a week and £600 odd a week? 13% on more than that?) but it will allow the whole system to be folded into the income tax system.

Desirable for two reasons. Firstly reducing complexity, thus costs of administration, is a good idea. Secondly, as a political aim.

It\’s generally accepted by economists that some or all of \”employers\’\” national insurance is in fact paid by the worker in the form of lower wages (quite how much is a matter of heated empirical argument but the arguments run from much to most to all, no one who can count even trying to argue for none). Making this clear, as NI is folded into income tax, helps to place an upper bound on how much can actually be raised in income tax.

When people realise that the upper rate is now not the headline 50%, but more like 64%, the basic rate not 20% but more like 45%, there will be a certain political pressure….well, maybe to reduce these rates, maybe just to insist that they don\’t rise any further.

For for some decades NI has really operated as a parallel and near hidden income tax. Making it clear and open makes the price of what is supplied in return clear.

Me, I think that\’s a good thing.

18 thoughts on “Reforming the State pension”

  1. I also like it because it is a step on the road to a citizens income. Non means tested benefits do not have vicious withdrawal rates that discourage earning, let alone saving.

  2. From the article: “The changes are likely to benefit married couples and stay-at-home mothers the most, as the latter often fail to qualify for the full basic pension because they have taken time out from work and have not built up enough national insurance contributions.”

    IIRC the last Labour budget reduced the numbers of years of NI contributions needed to qualify to 30.(From 40 something?) How might this proposal compare with the Labour one?

    I agree that it is good to be decoupling pension payments from NI contributions for the reason of making it much clearer how we are taxed and at what level. The next step would be what, simplifying NI to fewer rates and levels or even just ‘an extra % point on your income tax rate’. There is almost no point in differentiating between the two but could the coalition successfully argue for appearing to put up income tax? Media reporting of politics is atrocious at the best of times and abominable when it comes to tax matters.

    Might we be slowly creeping towards few taxes levied at more honest rates? I was reminded recently that George Osborne suggest flat taxes when he became Shadow Chancellor. Perhaps deep at the heart of the coalition are people who see the benefit of simpler taxation not just for taxpayers and revenue raising but also from restraining Government spending. It would be nice but I’ll not hold my breath.

  3. Yes lets roll NI into income tax and tax the people on Pensions who pay no NI. What a good idea-these people are clearly very well off : good annuity rates ,high savings interest rates and holding on to money that will soon be the States anyway when they die.
    While we are at it lets reduce the Pensions of those on Final Salary schemes and already retired to align them with the current situation of those now working!
    Eventually someone will propose all this-God help us all and this miserable country where we all soon be reduced to being beggars.

  4. What about the poor sods who deferred their Old Age Pension by a few years to get a bigger one: will they be screwed?

  5. It was only two weeks’ ago you were saying benefits should only be a safety net (ie means tested)!

    Tim adds: The old age pension isn’t a benefit, it’s a form of social insurance. Insurance against living so long that you outlive your rational level of savings.

  6. And not forgetting those trying to start a business and not drawing a salary nor benefits – not being “available for work”, don’t you know.

    If NI was actually NI, it would be a defined contribution scheme and cover Health too. It is just a Ponzi scheme, so I suppose tinkering with a Ponzi scheme is ok as it is all B-S anyway.

    One question – if this becomes law and begins, what of those who had previously needed to top up, would that mean that “all bets are off”* in terms of NI shortfalls from the past, even if the system changes again? Would the law against retrospective enforcement kick in?

    * http://www.youtube.com/watch?v=N9_tl_b-bFs

  7. It is just a Ponzi scheme, so I suppose tinkering with a Ponzi scheme is ok as it is all B-S anyway.

    Correct. Anyone who classes NI as anything other than a slightly unfairer and more bizarre income tax than regular income tax, or the state pension as anything other than a state benefit (and indeed, anyone who includes the future value of state pensions in national debt calculations) is both wrong and silly.

  8. RT @ 6,

    I suspect that the civil servants at the DWP were alive to the problem of exacting money under false pretences from those who “felt they had to top up” when they commissioned a computer system which conveniently failed to send out deficiency notices.

    Unfortunately for the conspirators, the policitians weren’t even bright enough to understand this conspiracy after the fact and reinstated the notices amid much public fanfare.

  9. Marksany: On the other hand, non-means tested benefits require vicious tax rates that discourage earning, and saving. (I remember once while working on tax revenue forecasting in NZ, we pondered the question of a universal income, and, by saying that it would replace all the existing benefits, were getting tax rates of an average of 50% (not 50% top marginal, an average of 50%) on all income for a lower rate than the existing means-tested benefits.

    There’s no good answer to the trade-off between high overall cost if you don’t means-test, and very high marginal tax rates if you do means-test.

    John B: and indeed, anyone who includes the future value of state pensions in national debt calculations

    I was with you up until this. Past parliaments have, rightly or wrongly, made promises about future uses of taxes, not just pensions, but when the government borrows debt it says that future governments will repay it to the bondholders, when it covers a liability it says that future governments will pay the money out of tax revenue if some conditions are met. Future parliaments are presumably free to repudiate those promises (I am not a constitutional lawyer). But until they do, doesn’t it make sense for voters to have an idea of what the promises piled up add up to?

    (I see a certain sort of merit in saying that governments should not be able to make future promises beyond the life of the government, but that raises a who-shall-bell-the-cat problem. only parliament can make such a commitment binding on itself, and most parliaments adore the thought of promising future goodies).

  10. Good luck telling all existing pensioners that you’re increasing their income tax by 11% (or 25% is that’s what you say it is).

    Can’t see any downsides at all, can you?

  11. @9, no Parliament can make restrictions binding on another Parliament. And none of the recent developments in constitutional law vs EU law change that – if a UKIP government were to repeal the European Communities Act, we’d be out of the EU no questions asked (yes, even after the latest round of treaties, although there’s a two-year phase-out process it’d be polite, but not compulsory, to follow).

    So if we’re going to collatoralise future pensions as part of the national debt, we also need to collatoralise future defence spending, future welfare spending, etc – after all, you can’t imagine a government abolishing all safety nets and the army, can you? (I’m fairly sure the maniacs who want the former are completely disjoint from the maniacs who want the latter…).

    Actual debts, with a contract, that the government would face legal rather than electoral consequences from not following, are rather different. Which is why they, and not the other ones, are counted under sensible definitions of the national debt. And why anyone claiming the national debt is more than about 5% higher than the official figures show (approximate present value of capital element of PFI contracts) doesn’t really understand the issue, and anyone claiming it’s more than about 25% higher (approximate present value of all PFI contracts including future services to be provided if they’re provided) is a lunatic.

  12. I’m not sure I believe any of the figures used to determine the NPV of an ongoing/future liability: they all use “risk free returns” based on gilt yields, but gilts have been massively manipulated by QE.

  13. John B, on the one hand you say:

    And why anyone claiming the national debt is more than about 5% higher than the official figures show (approximate present value of capital element of PFI contracts) doesn’t really understand the issue

    On the other hand, you say:

    So if we’re going to collatoralise future pensions as part of the national debt,

    The relevant definition of collateralise here is to secure a loan, by providing collateral, and collateral in that context means property. So, for example, a loan can be collateralised by promising that if you don’t repay it, the lender can take your house.

    However the earlier discussion was on whether future pensions should be included as part of public debt, which is entirely possible to do even if future pensions have no property pledged to pay them.

    Given your unusual use of the world collateralise, I am not impressed with your claims that anyone who disagrees with you either doesn’t understand the issue, or is a lunatic. You might still be right, but you have not provided any convincing display of competence. After all, it requires very little understanding or sanity to accuse other people of idiocy or lunacy.

    As for including future defence spending and future welfare spending, if the government has made a firm and substantial multi-year spending commitment, such as large capital investments in say naval ships or hospitals, I think that indeed should be included, just as much as a promise to pay pensions.

    Actual debts, with a contract, that the government would face legal rather than electoral consequences from not following, are rather different.

    Indeed, but you have yet to convince me that they are different enough. Why should the government report any debt figures at all? A reason that springs to mind is that so voters and potential lenders can judge the costs and benefits of proposed new policies, or the closure of old policies. If a government has committed to spend x billion on something, and the current government does not plan to eliminate that commitment, that’s relevant information.

  14. Well replace collaterize with securitize, which should clear up the confusion.

    One problem with securitising things like pension obligations is that obviusly you have a debt but you also have an asset – a point Michael Lewis missed in his piece on Greece. If the country has $300bn of unfunded pension obligations, it also has $300bn of penion assets. Or it has neither.

  15. Matthew – collateralise means providing property to secure a loan.
    When you securitisie a loan that means you buy loans from lenders, group the bonds together, and then sell bonds, and you pay the interest on the bonds from the payments received from the borrowers.

    The two are distinctly different processes. One can’t just replace one word by another. To collateralise pension obligations would mean something like setting aside money equal to the NPV of the future cost of pensions in a Swiss bank account, or buying up large swathes of land with the plan of selling it to pay the pension debt if necessary.

    I’m having trouble figuring out what securitising would mean in the case of public pensions. The asset is owned by UK citizens, unless a UK parliament recinds it (the right to receive x amount of money after a certain age), who has the debt obligation is unclear (if you earn less money your tax bill goes down, but if everyone decided to earn less money then parliament would have to chose amongst the options of cutting other government spending, reducing the retirement income, or raising taxes). How could securitisation legally happen? I can see that some people might be willing to sell the rights to their pension in return for upfront money, but why as a taxpayer would I want to agree to this? I strongly suspect that many of the people who would sell their rights to a pension in return for upfront money would gamble or waste away the upfront money, and then the taxpayer would be expected to bail them out again. So taxpayers would be paying twice – once to the people who brought the bonds, once to the people who sold the assets. Tough sell. Plus, of course, all the leftists would be up in arms about paying money to those capitalist bondholders.

    If the country has $300bn of unfunded pension obligations, it also has $300bn of penion assets. Or it has neither.

    All this means is that Greek citizens expect to receive $300bn, from future Greek tax payments. It doesn’t help with actually paying the pension obligations in the future. That’s why they call them “unfunded”.

  16. Tracy – obviously I’m using the term to mean “calculate the present value of future obligations”, which is a legitimate use in an accounting context.

    On pension payouts, the UK government can pass laws to say that pension payouts are *whatever it wants them to be* over the next 10, 20, 50 years, and nobody will have any legal recourse against this. The only constraint is that old people might vote against the government and/or starve in the street.

    On defence, specifically excluding projects that have already been legally committed to, the UK can pass laws to spend *whatever it wants* on defence over the next 10, 20, 50 years, and nobody will have any legal recourse against this. The only constraint is that if we abolish the Army, the French might invade, and that’d be embarrassing.

    We know that no conceivable government will cut either pensions or defence spending to zero. But we also know that the choice of how much to spend on either is a political one, not a legal obligation like repayment of government bonds.

    My take would be that calculating the present value of non-committed defence and pensions spending and adding that to the *actual* national debt to produce a SuperTurboMegaNationalDebt figure is a bit of a silly thing to do. But there’s absolutely no justification for doing that for pensions and not for defence (or education, or healthcare, etc), which is what right-wing pundits trying to claim the UK is totally busted frequently do.

  17. John B – obviously I’m using the term to mean “calculate the present value of future obligations”, which is a legitimate use in an accounting context.

    Firstly, it wasn’t obvious. Secondly, while I am not an accountant, I have taken accountancy courses and worked closely with accountants, and I’ve never heard them use the word collateralise in the sense you use it. I have done a search online for meanings of collateralise in specifically financial dictionaries, and the meaning is as I defined it. See http://financial-dictionary.thefreedictionary.com/collateralise for example.

    Of course, there is no official master of the English language, in some sense it is legitimate to use any word any way you like (like people using “literally” about figurative speech), but using a word in such an unusual way does make me skeptical about your knowledge of accounting, and thus remarkably unimpressed with your assertion that anyone who thinks differently to you simply doesn’t understand the issue.

    On pension payouts, the UK government can pass laws to say that pension payouts are *whatever it wants them to be* over the next 10, 20, 50 years, and nobody will have any legal recourse against this.

    Well, to be pedantic, the UK parliament can pass laws. As far as I know (bearing in mind I am not a constitutional law), the UK parliament can also pass laws to say that it will now only pay half of its outstanding debts, and as long as the UK parliament has got all the constitutional details right the only constraint bondholders will have is to refuse to loan anything more to the UK government. That threat is why governments normally go cap-in-hand to the IMF rather than repudiate public debt.

    But we also know that the choice of how much to spend on either is a political one, not a legal obligation like repayment of government bonds.

    As the UK parliament can repudiate government bonds, I don’t think that this is a relevant distinction.

    My take would be that calculating the present value of non-committed defence and pensions spending and adding that to the *actual* national debt to produce a SuperTurboMegaNationalDebt figure is a bit of a silly thing to do

    Why should anyone care about your take on it? You have shown no signs of being an expert on accounting.

    But there’s absolutely no justification for doing that for pensions and not for defence (or education, or healthcare, etc)…

    It’s money the UK parliament has promised to pay in the future, and people have made plans based on it. Unless and until the UK parliament rescinds those promises, it should be affecting their and us voters decisions about other policy options.
    As for including defence, education, healthcare, etc, if the same conditions hold, then I’m in favour of counting that in.

  18. I meant I’m not an expert on constitutional law. (Although I’m also not a law, of parliament, or of nature). Darn.

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