Yesterday the Centre for Policy Studies claimed that pensioner households that received more in income from the state than they p[aid in tax were a burden that justified further welfare reforms.
That’s nonsense. But what the CPS ignored is that the cost of tax relief for private pensions is now a staggering £48 billion a year, made up of £34 billion in tax relief and £14 billion of national insurance subsidy. That is a staggering 14.8% of all income tax, national insurance and corporation tax to be collected in 2015-16. It’s also about 50% of the total cost of state pensions.
The real question is why we now provide this relief when such relief can now be claimed without a person actually taking a recognisable pension that guarantees an income for life, or even by participating in a mutual arrangement where risk is collectivised, which was always been the underlying social logic of pension arrangements that justified tax relief. When, instead, pensions have become little more than another form of saving for those better off the logic of tax relief to encourage savings that the economy does not need and which do, in the vast majority of cases, simply increase the wealth divide (because only those already sufficiently well off to make ends meet can, in the main, make pension savings) makes little sense.
Pensions tax relief is not tax relief it is tax deferment. You pay tax on the income you get from that eventual pension.
Further, that “relief” is the not a cost associated with pensions being paid out today. It is a cost associated with the pensions that will be paid out in the future.
Thus the net cost of the deferment needs to be what tax is not collected now minus what tax will be collected in the future. At net present values if you like. Wouldn’t entirely surprise me to find that the net number is positive although I somewhat doubt it will be.
Unless and until Ritchie provides us with that calculation he’s just wibbling.