Michael Meacher MP

So the new Office of Budget Responsibility (OBR) is daily earning accolades as the Government’s arms-length battering ram to hammer away at the targets the Tories have long had in their sights for shrinking the State.   Yesterday it was their announcement that the structural deficit (the part of the overall budget deficit that still remains even when the economy has returned to its trend economic growth rate of about 2.5%) was in their view much larger than previously estimated, namely about three-quarters of the current deficit or about £120bn.   That conveniently allowed Osborne to ‘justify’ much deeper spending cuts in order to eradicate it in the course of this Parliament.   If he is serious about this, and he appears to be, the cuts will be the deepest since the Second World War, deeper even than Thatcher’s.   And now it’s public pensions next in the firing line. (more…)

The pensions timebomb is ticking away. Recent reports estimate that private sector pensions are more than £200bn in deficit, and the shortfall in guaranteed promises to public sector workers may now be as high as £1 trillion, which is two-thirds of Britain’s entire GDP. On both counts the current position is untenable. In the private sector employers are abandoning final salary schemes, based on end-of-career earnings and years of service, and replacing them by defined contribution schemes, where contributions throughout working life are paid into a fund which is invested and the size of the pension is then determined by the value of the fund investments at the time of retirement. In the public sector, the guaranteed final salary pensions can only be paid for either by people in such schemes over the age of 50 delaying retirement or taking a cut in occupational pension income of at least 10%. if younger workers are not to be forced down into poverty to honour the guarantees given, which would act like a tax on younger generations. A fundamental re-drawing of the pensions landscape is now urgently needed. What would it look like?

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It is rarely talked about, but it is a far more serious looming crisis than most issues that make it on to the front pages. Today’s release of the unsexily entitled Households Below Average Income data from DWP reveal that pensioner poverty has scarcely reduced at all over the last decade, and it is now in the credit crunch sharply getting worse. The UK single person State pension, at just 18% of average earnings, is already one of the lowest in Europe where the average is proportionately three times higher at 57%. Official figures confirm that more than 2 million people over 65 in the UK live in poverty (i.e. their total income is less than 60% of the average income). What makes this even more disturbing is that four-fifths of pensioners in this country rely on some form of savings to supplement their pension, and these savings have been decimated by the credit crunch. A year ago the average pensioner couple drew 33% of their income from savings; that is now down to only 5%. Two lessons stand out from this bleak picture. One is the gigantic chasm now between top and bottom pensions, and the other is the fundamental inability of the private sector to guarantee decent pensions for all.

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The Treasury’s proposal to reduce Sir Fred Goodwin’s £693,000 annual pension by half is a fudge and will satisfy nobody. It is arbitrary (why a half?), it will nowhere near assuage public anger which is still mounting sharply, and it is targeted at just one man who is not alone in his recklessness. Whilst Goodwin is an egregious symbol of greed and arrogance, there are many other bankers, at chief executive and board level, not much less culpable who should not be allowed to escape scot-free by the scapegoating of Goodwin. So what should be done?

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From The Guardian
The pensions system is in turmoil, with 2.2 million pensioners – more than a fifth of the total in Britain – living below the poverty line.
The government’s own projections estimate that workers on average earnings retiring in 2050 can expect to receive a pension of about only £100 a week at today’s prices – below the level at which means-tested supplements are payable.
This reflects the fact that Britain is one of the most unequal societies in the west – the richest 10% now taking home 28% of total income; the poorest 10% getting less than 3%.
When the gap between top and bottom is some 179-fold – between the employee on a national minimum wage of £4.85 an hour, or £179 a week, and the chief executives of the top 100 FTSE firms on, including bonuses, an average £1.67m a year, or £32,115 a week – an adequate pension can only be secured in one of three ways.
Either the lowest earnings levels have to be substantially raised to project a pension above the poverty level, the array of means-tested assistance in retirement has to be even further extended, or the rules for calculating the pension must have a strongly redistributive element built in.
The Wilson-Callaghan Labour governments chose the third route by introducing the state earnings-related pension scheme in 1978. The latter, however, which would by the time it matured in 1998 have taken almost all pensioners above the poverty line, was emasculated by Margaret Thatcher and replaced by this government in 2002 as part of its plan to shift pensions provision to the private sector.
This exposed a huge swath of pensioners to the collapse in private pension values in the bear market of 2000-2003 and led to a funding gap in occupational schemes, estimated at £61bn in the case of FTSE 100 firms alone, and a large fall in the proportion of firms with final salary schemes open to new employees – from 56% in 2002 to only 38% this year.
The third major failure has been to allow employers to take advantage of the long bull market in the 90s by taking unilateral contribution “holidays”, without provision for falling market values. The Inland Revenue estimates that companies with a pension deficit skipped contributions worth £27bn during 1988-2001 and employers saved about £4,000 per employee in the 90s.
So what should be done? First, the government should accept that increasing the basic state pension merely in line with prices, plus topping-up with the means-tested pension credit, is unsustainable. The basic pension, already only 16% of average earnings, will – on present trends under this policy – fall to less than 9% within 30 years.
The Institute of Fiscal Studies says the pension will be so low that 64% of pensioners will be eligible for the pension credit in 20 years’ time, and as many as 82% by 2050. Worse, because of the means-testing, not everybody entitled gets it – nearly a third miss out. The basic state pension of £79 per week should be increased to the pension credit level of £105 per week and then linked to earnings.
The net cost of this rise by 2005- 2006 would be £7.3bn; if it were restricted to the over-75s, where the vast majority of poor pensioners are concentrated, the cost would be £2.7bn. But is this affordable? Britain’s public pension system is one of the most meagre; coupled with the erosion of the private sector pillar, it is untenable.
The average retiree gets only a third of earnings, compared with nearly a half in the United States and threequarters in the Netherlands and Sweden. In Britain the state spends about 5% of GDP on pensions, below half of its EU partners.
A one-third rise in basic and future indexation with earnings, requiring at most a further 1.7% of GDP, is clearly achievable. The National Insurance fund had a surplus of £29.3bn for 2003-2004, £20.1bn more than the “reasonable working balance” recommended by the government actuary.
Second, given the vulnerability of over-dependence on the private sector, a much stronger state pensions sector needs to be built up with a strong redistribution element to benefit the poorest third. Even the full state second pension combined with the basic provision, despite assistance to the low paid and carers, provides an income scarcely above the pension credit guarantee.
Third, government at present grants £14bn a year towards pension contributions, including half benefiting the highest paid 10th of earners. Why does a government so set on using means tests inversely concentrate tax reliefs on those who need them least?