pensions

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

Should the triple lock be broken?

Published by Anonymous (not verified) on Wed, 18/08/2021 - 5:10pm in

There is much heat in the papers over the news that Rishi Sunak is likely to break the supposed pension triple lock that has guaranteed pensioners wage or inflation matching increases in their incomes over the last decade.

The ‘triple lock’ guarantees that pensions will increase by either 2.5%, the rate of inflation, or the level of earnings recorded in the July employment figures for the previous year. It’s been a Tory promise for about a decade. The result has been that the real rate of pensions has increased. But let’s not celebrate: the real rate of UK state pensions is still way below the European average and guarantees that many pensioners live in poverty.

So what’s the issue? It is simply that because of the pandemic apparent pay rises in the last year look to be about 8%. That’s because, firstly, there were a lot of people who lost their jobs when the pandemic hit. They tended to be the young and those on low pay. Employment for them has not recovered. So those now in work tend to be on higher wages. They’re not earning more. In fact they may be no better off. But because the low paid have fallen in larger proportion out of the workforce average pay appears to have risen when no one is much better off. So, there’s a statistical freak happening.

Secondly, furlough suppressed the wages of millions a year ago, and now it is not to the same degree: people only got 80% of their wages under furlough.

Put those facts together and the result is a statistic now that might give pensioners an 8% pay rise, which the government does not want.

What are the lessons? There are several. First, don’t use statistics as a substitute for policy. Claiming that the triple lock was a good deal is now shown to only be true when it is a deal in the government’s favour. That’s not a policy. That’s an excuse for a policy.

Second, get the statistics right. Like so many of our national statistics, it turns out this data is not robust. It’s time to be honest about that fact.

Third, tackle the problem with youth unemployment, and their low pay. The triple lock was always going to create inter-generational injustice, and this issue just proves it.

Fourth, rethink pensions. The triple lock has done nothing to tackle pensioner poverty in the UK, which is a national disgrace and which is not corrected by benefits that have to be claimed, which millions do not do, whether because of pride, lack of knowledge of entitlement or inability to handle the process. It’s time we got pensions right, and this latest issue is a clear sign that we have not.

So, should the pension triple lock be honoured? The answer is yes, if it’s still thought that using data to determine pay increases for pensioners is the right way to go. And it’s no if the decision now is to use a better basis for informing pension decision making that guarantees that the elderly in this country do not need to live in fear of winter and the cold that it brings because they simply do not have enough money to stay warm and eat at the same time.

What do I favour? A proper review of pension policy, of course. But since an 8% increase would be insufficient as an answer to any such review I think the pension lock should be honoured as a step in the right direction.

Will either of those things happen? Of course not. Why? Because this government does not care. Pensioners should really remember that next time they come to vote.

Johnson is right to think pension funds have a role in infrastructure investment, but he gets almost every other suggestion he makes on the issue wrong

Published by Anonymous (not verified) on Thu, 05/08/2021 - 4:44pm in

The FT includes an article today in which it is said that:

Boris Johnson has called on British pension funds to plough more retirement savers’ cash into UK assets to spark an “investment big bang” to support the economic recovery.

Johnson has apparently written to pension funds and other institutions using them to “seize the moment” and use their “hundreds of billions of pounds” to invest in infrastructure. Suggestions include bridges, roads and wind farms.

First of all, Johnson has the scale of pension funds wrong. There is more than £5 trillion of pension wealth in the UK according to the Office for National Statistics. The available resources do, therefore, exceed a few hundred billion.

Second, Johnson is right to suggest that pension funds are inappropriately investing in equities: there is no evidence that they have anything like the worth now given to them by markets. It is only the impact of quantitative easing, and the resulting suppression in interest rates that is suggesting that they have anything like the value that they now enjoy.

Third though, I very much doubt that the UK want more private roads or bridges. They neither appreciate tolls and nor do they want another equivalent of PFI. Johnson's suggestions appear flawed from the outset.

Fourth, Johnson ignores that all the available funds that are required for infrastructure investment are readily available to the government at the lowest available possible cost, since UK government interest rates are still at exceptionally low levels. The refusal by him and Sunak two use this opportunity to invest right now is an economic crime. Their suggestion that there is a shortage of funds unless pension funds cooperate in investment is incorrect: at least in theory the government could create all the required money whenever it wishes, and markets are keen to own debt if it wished to issue it in association with that funding, although that again is not a pre-requisite of it happening.

Fifth, if Johnson really wants to change pension fund investment he really does not have to beg or plead. With Colin Hines I have suggested the solution. All he has to do is change the rules on pension fund investment so that in exchange for tax relief on new pension contributions, which amount to well in excess of £100 billion a year, 25% of that new money has to be invested in new UK infrastructure that creates jobs in this country. It's really not hard to do. I have solved his whole problem with that one idea.

Sixth, why won't he do this? It's a question to be asked. I wish the Opposition was asking it. But they have still to adopt this position, so no wonder the government does not feel under pressure to do so.

And finally, it is conceptually very hard to work out why any government has a problem thinking that the tax reliefs that it gives should not be aligned with the social and economic goals it has, and yet there appears to be a massive problem with governments making this connection. Why is that?

Of all the options available to pay for social care national insurance is easily the worst

Published by Anonymous (not verified) on Tue, 20/07/2021 - 5:05pm in

I have posted this threat to Twitter this morning:

The idea that national insurance should pay for the increased cost of social care for the elderly is hideous. It reveals that the government does not know how tax works, how the economy functions, or how tax impacts inequality. A thread……

The Times has reported that the government is planning to increase the national insurance paid by both employers and employees to pay for the UK’s social care crisis. As tax decisions go, this one would be terrible.

It’s true that we have a social care crisis in the UK. Just as we need more healthcare, education, police, justice services, environmental protection and much more, so do we also need more social care.

Ultimately, the government has to at some time decide that what the people of this country needs is not more takeaways, nor more mobile phones, or gambling, alcohol or television channels, but is instead fundamental public services.

All public services are paid for in the same way. The government decides to provide them. It passes a budget to approve the spending. And using the authority of Parliament the government then tells the Bank of England to pay the resulting bills.

The Bank of England will then always pay whatever the government commands it to do. It simply advances the funds required to the government on overdraft. It has a legal obligation to do so. It cannot say no.

The government then has a decision as to what to do with the overdraft. It can clear it with tax. It can borrow. It can create new money using quantitative easing. And it could, although it’s choosing not to do so, leave it on overdraft, which it calls the Ways and Means Account.

So, the first thing to note about tackling the social care crisis is that the decision to spend is not dependent on the ability to raise tax to pay for the cost. To pretend that’s the case is false: like more than £300bn of spend in the last year it could be paid for with QE.

Or the government could borrow. Or simply run a cost free overdraft with the Bank of England. There are choices. And right now, there’s no evidence that any of these non-tax options will create inflation. Borrowing might even reduce inflation in asset prices e.g. shares.

I make the point to make clear that the decision to tackle the social care crisis is independent of any decision on how to clear the overdraft that doing so will create for the government and the Bank of England. To pretend otherwise is false.

But if the government chooses to tax, why use national insurance? The UK tax system can and should be used to shape society in the UK for the advantage of all who live here. It should, in itself, be used to tackle social problems.

We have a social care problem, but we also have a problem with a shortage of well-paid work, businesses under cost pressure because of the Covid crisis, and with massive inequality which has been fuelled by the government deficits over the last year.

It seems it is not widely understood that every pound of government deficit does, by definition, increase private wealth by an equal amount. It has to. After all, someone has to get the pound that was created and not taxed back. A private person does.

More than £300 billion has been pumped into the economy by way of government deficit spending in the last year. Thank goodness for that. It kept the economy going. It was essential. But it has meant that the wealthiest in the UK are now a lot wealthier.

So, now the government wants to tax, knowing these facts. And what it’s deciding to do is in the face of them increase national insurance charges to pay for a social care crisis.

National insurance is a deeply regressive, and very unfair tax. It starts being paid when a person earns just over £9,500 a year (worked out weekly). Income tax is not paid until a person earns the equivalent of £12,570 a year. That’s the first unfairness.

Then national insurance is charged at 12% on the employee and 13.8% on the employer (which is a cost that economists agree effectively comes out of wages, so it’s really paid by the employee). That’s a combined tax of near enough 25.8%, higher than basic rate income tax.

Add on to that the fact that national insurance largely stops, by falling to 2%, when wages reach £50,268 a year (current rates), and the tax suddenly looks very far from progressive.

In other words, what the government is going to do is ask those on the lowest pay to suffer a tax increase to pay for social care. It will, in real terms, charge those on higher pay less as a proportion of their total discretionary income.

It will ask vulnerable employers to pay more. That threatens smaller business in particular. It also encourages more tax evasion.

And the young will pay more to subsidise the old when the young already get a pretty poor deal on everything else in life, from paying for their education that those in retirement never did, to facing higher house prices, onwards.

Now consider the alternatives. I’ll mention four, but there are more. These all leave those on lowest incomes alone. They all target wealth - where we know the capacity to pay has gone up most. And they don’t harm employment.

First, equalise the tax rate on capital gains tax and income tax. Why should capital gains be taxed at rates that are often half those that would be paid on income? Capital gains tax is paid by the wealthy: they should be taxed more to tackle inequality.

Second, reduce the capital gains tax annual allowance. Why should the wealthy who have capital gains get two annual allowances of tax free income a year when the rest of us get one? This bias in their favour should be eliminated, or reduced dramatically.

Third, reintroduce an investment income surcharge. This is an additional tax at 15% on investment income due because there is no national insurance paid on interest, dividends, rents and other investment incomes.

Because national insurance is not charged on investment income the tax rate due on it is massively less than that due on work. That is absurd, and socially wholly unjust. Why should the wealthy pay much less tax than everyone else?

A 15% additional tax on investment income existed until about 1985. Reintroduce it, giving a higher allowance to pensioners if need be, and recreate social justice.

And fourth, cut the massive subsidy - costing over £10bn a year - on the pension contributions of some of the wealthiest in society. Why should the savings of the wealthy be so heavily subsidised when there is a need for social care?

Add all those up - or just do some of them - and the supposed £10bn required to pay for social care is readily available without ever hitting the least well off, the young, the employed and small employers hard, which is what the government plans instead.

What is more, the problem of excess wealth is tackled, and some of the supposed inflation pressure in the economy - which is being created largely by the wealthy - will also be reduced.

The government need not tax if it wants to pay for additional social care. But if it decides to do so it must tax in ways that ensure that social justice is delivered. National insurance cannot deliver social justice. My suggestions can. Why are they getting this wrong?

A bias towards labour? That wasn’t what I expected to see

Published by Anonymous (not verified) on Fri, 11/06/2021 - 4:49pm in

The FT has reported this morning that:

Companies hard hit by Covid-19 may have to put dividends on hold if they are facing a cash squeeze but have large pension shortfalls, the UK regulator has warned.

They added:

David Fairs, executive director of regulatory policy with the Pensions Regulator, said retirement schemes should “not be the only creditor feeling the pain” if a company is struggling to recover from the impact of the pandemic.

There are, of course, companies who are struggling after the Covid crisis. Pension fund contributions often take the hit in this case, coming (it seems) at the bottom of the pile of priorities in many cases, with significant pension deficits existing in many companies.

I am delighted to see this attitude from the regulator. Employees have a higher claim on a company than its shareholders. It is the shareholders who, after all, take the residual risk in any company, not those who do or have worked for it. I hope that this new bias is pursued: it is right and proper.

The fundamental pension contract is failing

Published by Anonymous (not verified) on Sat, 10/04/2021 - 4:59pm in

People think that pensions are all about saving, financial speculation, and living off your money in old age.

The trouble is that this model of pension provision is failing because financial markets are no longer providing reliable financial returns, and there's no likelihood that they will.

Worse still, this form of pension provision has meant that a generation (mine) has failed to invest in the real assets that are essential if the next generation (our children) are to have the means look after us in old age.

That's the real worry, and only radical action can put that right now. I explain this in more depth in this video.

I have been asked whether transcripts of these videos are possible. They aren’t, easily. But subtitles can be turned on by clicking on the three blobs in the top right hand corner of the video and clicking the option to add captions. They will not be perfect, but they will help. 

From here to the FT: Jim Osborne’s thinking on pensions gets a wider airing

Published by Anonymous (not verified) on Wed, 07/04/2021 - 5:28pm in

I share this post by Jim Osborne on the Facebook page of the Scottish Banking and Finance Group:

The Financial Times has picked up a story about my proposals for an NPIF - see this piece in the "Pensions Expert" section of the FT today. Richard Murphy kindly gave me the opportunity for a two part guest post on his Tax Research UK blog a couple of weeks ago and it seems to have caused rather a stir amongst asset managers and other financial intermediaries. I was offered a "right of reply" so the article quotes what I said and has quoted me accurately.

Much (but not all) of the reaction is (unsurprisingly) hostile but it seems to have got folk talking.

I gather that Jim is preparing responses.

From my perspective, no guest post has had more impact than that.