04.05.2005
Towards a socialist pensions policy
According to bourgeois economists, demographic changes mean that the state is no longer able to fund adequate pensions, and so workers must make their own arrangements for the future. Nick Rogers looks at the truth behind the myths
Whoever has won the general election, Britain's pensions' system will be the focus of important struggles for workers in the next four years. From virtually the moment the polls close, the pensions of public sector workers will come under renewed threat. Later in the year the pensions commission under former CBI chief Adair Turner - set up as a device to kick the issue into touch until after the election - will make final recommendations that may influence the way pensions in Britain are delivered for everyone well into the second half of this century. The labour movement is ill-prepared for the struggle to defend existing pension provision, let alone poised to demand a pensions system that will allow every retired person to live a dignified and fulfilling life. A few weeks ago the unions called off across-the-board strike action in the public sector at the first hint that they had succeeded in making the government think again about its proposals to raise the retirement age and move from final-salary to average-salary schemes. The government continues to insist that it has not withdrawn its proposals and there is little indication that it will significantly amend them during promised negotiations. Hostilities will resume at a time of the government's choosing. Will union leaders have the backbone for a determined struggle? As for the wider debate about pensions in Britain, the TUC, in responding to the first report of the pensions commission, surrenders important ground to those arguing for a further extension of the private provision of pensions. Apparently "it will not be realistic to expect the entire shortfall in pension provision to be met by higher taxation - not least because of political constraints" (TUC response January 2005, p6). The TUC is not even prepared to exert very much effort to defend those occupational pension schemes which, by guaranteeing pay-outs linked to earnings in work, provide a modicum of security to workers contemplating retirement: "Trade unions will continue to defend good defined benefit schemes and work with employers to keep them open wherever possible" (my emphasis ibid p33). Not exactly fighting talk, but better than nothing. However, a few paragraph later the TUC has already given up on expanding defined benefit pension schemes and is outlining proposals on the assumption that, "As money purchase arrangements are likely to expand rather than contract in the future "¦" (p34). The very same money purchase schemes that, every commentator on the issue acknowledges, 'transfer risk' from employers to workers. On such shifting sands are the pensions of future generations to be built with barely a whimper of protest from Britain's trade unions. Across Europe - in France, Italy and Germany - the political scene over the last decade has been punctuated by titanic struggles, some of which have brought down governments, in defence of state pension provision. Britain's labour movement has four years to try and turn around the debate here. Given the supine inclinations of Britain's union leaders, socialists must take on the role of articulating a pensions policy that can help point the way towards a truly human society. Paygo v funded pensions The mainstream debate about pensions revolves around two very different concepts of how society should provide income to the retired. Pay as you go (Paygo) pension provision - without exception provided by the state - pays for pensions directly out of current income. In Britain all state pensions are funded on this basis. The pensions of today's retired are paid for out of current government revenues (whether taxes on capital or workers). It is true that the levels of pensions received by Britain's pensioners are based on the contributions the retired paid while they were in work. So male pensioners who have not made national insurance contributions for 44 full years or women who have not done so for 39 do not receive full basic state pensions. The concept of national insurance was placed at the heart of the British welfare state by William Beveridge in his 1942 report and was intended to establish the principle that the recipients of welfare payments had 'earned' their payouts and were not the beneficiaries of 'charity'. But national insurance contributions are not placed into an investment fund earning dividends and interest payments, out of which pensions and other welfare payments are paid. Indeed over the last 50 years the Conservative Party and private pensions industry has balked at any proposal that the government establish just such a fund on the basis that investments by a government-backed fund in the stock exchange would represent 'creeping nationalisation by the back door'. On the contrary, national insurance contributions go straight into the general government revenues and are treated in a virtually identical way to income tax. Interestingly, pensioner campaign groups in the 1940s were arguing for non-contributory pensions set at a much more generous level than envisaged by Beveridge or the Attlee government. In a 1958 paper, US economist Paul Samuelson provided heavyweight academic justification for Paygo schemes. He argued that they established a relationship between successive generations that allowed pensioners to share in the increased income available from an expanding economy. By contrast, occupational and private pension schemes are generally funded. The only exceptions are public sector pension schemes - although, the local authority pension scheme is funded - that are paid out of current government revenues. In funded schemes workers make contributions into an investment fund. Pensions are then paid out of the growth in the value of the invested contributions. Today's contributions are designed to pay for tomorrow's pensions. In a collective sense, members of a funded scheme are supposedly contributing to their own retirement. There are two main types of funded pension scheme. Defined benefit schemes guarantee the level of pension members will receive - linked to salary in work. Calculations may be based on the final years of earnings of the scheme member - ie, final-salary schemes - or on average earnings over the whole period they were members - ie, average-salary schemes. Defined contribution (or money purchase) schemes, on the other hand, set the pension rate according to how well the fund is performing at the time the member retires. The member has no guarantee of the level of pension they will receive from the fund. Funded pension schemes are based on the philosophy that individuals should provide for their own retirement. There is extra security to be gained from participating in a collective savings pot with thousands of other members. Also employers usually make contributions to occupational schemes. But, in essence, funded schemes work on the same principle as the savings individuals may or may not put aside against a 'rainy day'. British pension system The British pension system presents a complex web of state pensions, welfare payments and occupational and private pensions. The system produces huge inequalities in the incomes pensioners receive. Arbitrary factors such as whether your boss was Robert Maxwell can make the difference between a comfortable retirement and penury. The state system consists of a basic state pension set at an extremely low level (£82 a week from April 2005) designed to provide a 'safety net' which protects against complete destitution. In 1975 Barbara Castle indexed this pension to the annual increase in wages or prices, whichever was higher. Her actions opened the prospect that the state pension would at least maintain its value against the general rise in workers' earning. Indeed in 1979, the basic state pension rose to its highest ever level against earnings of 20%. Also in 1975, Castle established a State Earnings-Related Pension Scheme (Serps) designed to ensure that all workers enjoyed levels of pensions that were to some degree linked to the earnings they had received in work. It was envisaged that Serps (once those workers who had made full contributions started to retire) would add an extra 25% of average earnings to pensioners. Over and above these two state pension schemes, workers might well be members of an occupational scheme. A combination of state and occupational pensions can in some cases provide a decent retirement income. Trade unions won opt-outs from Serps for members of occupational schemes and these were taken up by some occupational schemes. Similar demands by trade unions determined to defend the primacy of occupational schemes had scuppered proposals brought forward by Richard Crossman in the late 1960s for a state pension scheme making payouts linked to earnings. The Thatcher government was determined to destroy Barbara Castle's settlement. One of its first steps in 1979 was to break the link between the basic state pension and earnings. It was now inevitable that the basic state pension would decline over time in relation to average earnings and would lead to the increasing impoverishment of those pensioners dependent on it. Today the basic state pension is worth some 16% of average earnings. By 2030 it is expected to pay a pension equivalent to only 9% of average earnings. In the mid-80s Margaret Thatcher launched the next stage of her assault on the state pension system - undermining Serps. Pension payouts were cut and at the same time workers were provided with sizeable financial incentives to opt out, taking a proportion of their national insurance contributions with them. New Labour has set up a second state pension that is designed to take over from Serps. But the levels of pensions proposed are barely superior to the reduced Thatcher-level of Serps payments and by the mid-century will effectively become a flat pension, adding only a minor hike to the level of basic state provision. Means-tested benefits are available to pensioners who do not belong to a pension scheme or who have failed to make sufficient contributions over their working lives to receive a full state pension (only 16% of women received a full basic state pension). New Labour has introduced the concept of the minimum income guarantee for pensioners (set at a level of £105 a week), delivered in the shape of the pension credit. As usual with the parsimonious British welfare state, the means-tested pension credit has created its very own poverty trap. Pensioners who receive occupational or private pensions have means-tested payments reduced at a high marginal rate. Mainstream commentators complain about 'disincentives' to save for retirement. Pensioners have to live with the poverty that even the minimum income guarantee does little to alleviate. Furthermore, at least half a million retired people who are entitled to pension credit fail to claim it. Comparisons with continental Europe demonstrate how miserly Britain's state pensions system is. In France the state system provides the average wage-earner with a pension equivalent to 71% of their earnings when in work and those on twice average earnings with 54% of their salary. In the Netherlands the average wage-earner receives a pension equivalent to 70% of earnings when in work - a figure which can also be expected by those who were on twice average earnings (in most European countries state earnings-related schemes pay pensions linked to wages for workers on up to twice average earnings). In Britain the state guarantees pensioners who received incomes at average earning levels only 37% of their income in work. And for pensioners who earned twice average earning, only some 24% of their earnings in work. This makes Britain one of the poorest paying state pensions systems in the advanced capitalist world - below even the level of pensions paid by the US social security system (currently under attack from George Bush). State payments to Britain's pensioners cost the government 4.8% of GDP (6.1% if housing, council tax and disability benefits are taken into account). The equivalent proportions of GDP absorbed by other European state pension schemes are 12.1% in France, 11.8% in Germany, 9% in Sweden and 7.9% in the Netherlands - the European Union average is 10.4%. Traditionally, a particularly well developed range of occupational schemes, the majority based on defined benefit, compensated for the lack of generosity of Britain's state provision. The average British pensioner (with a total retirement income of about 75% of average earnings), therefore, fell not that far behind the average European pensioner (with a total retirement income of about 85% of average earnings). However, average statistics obscure a huge variation in levels of income among pensioners. Currently only 31.3% of British men aged 65 to 69 are receiving an occupational pension. In 2002-03 11.3 million workers were not making a contribution to any kind of occupational or private pension. It is often stated that government employees receive disproportionately generous (unfunded) occupational pensions. A statistic often bandied about has the government employing 18% of Britain's workforce, who receive 17% of earnings, but enjoy 36% of pension rights. But, since only roughly half of Britain's workers are enrolled in an occupational or private scheme, the statistic illustrates little more than the comprehensive coverage provided for government employees and the fact that millions of British workers in the private sector face an impoverished retirement. Early in its term New Labour sponsored 'stakeholder pensions' in an attempt to fill the huge gaps in occupational and private pension provision. The initiative has fallen flat on its face. Companies are obliged to set up a scheme of some sort for their employees. But take-up has been abysmal. Eighty percent of stakeholder pension schemes have no members. And among companies with between five and 12 employees only 4% have members. Margaret Thatcher's assault on a hardly over-generous state pension system in the 1980s - as with so much of the work of her government - served as a beacon to capitalist governments the world over. It is the predicted population changes that are being used as the battering ram against existing state pensions. Demography The World Bank's 1994 report, Averting the old age crisis, led the charge in this neoliberal offensive. A combination of rising life expectancy and falling birth rates means that almost everywhere the number of older people as a proportion of the population as a whole is set to rise over the next 30 to 50 years. In China, for instance, the one-child policy will stem the rising population, while it is estimated that rising longevity to lead to a population of 400 million over 60s by 2050. In Britain average male life expectancy at age 65 has grown from 77 years in 1950 (an expected retirement period of 12 years) to 84 today (19 years). Actuarial predictions are based on a life expectancy at age 65 in 2050 of 86 years. Equally significant is the falling birth rate - down to 1.7 children per woman in England and Wales. The lower birth rate has meant that over the last 20 years the so-called dependency ratio (the number of younger people and older people combined for each person of working age) has fallen slightly. After all, the baby boom of the late 1940s to early 1960s boosted the size of the potential workforce. Now that the baby boom generation are coming up to retirement, and due to be 'supported' by a smaller potential workforce, the dependency ratio will inevitably rise. The current ratio of four people of working age 20-65 to every person aged 65 and over is predicted to fall to a ratio of two to one. The neoliberal argument is that an increase in the tax take of the state in order to support a larger retired population is unsustainable. Just a few years ago rising global populations, as a result of high birth rates in much of the world, served as the scapegoat for the failures of capitalism. Now, as birth rates fall, a growing population of old people has become the spectre haunting global capitalism. The proposed solution takes two forms. First, raise retirement ages to reduce the number of years that workers spend as pensioners. Second, slim back state provision and encourage or force individuals to increase individual savings towards their own retirement. In other words, move towards the privatisation of existing state pension schemes and expand the space available for finance capital. Defending the retirement age Proposals to raise the retirement age represent a direct assault on the concept of retirement. The Conservatives responded to demands from the EU for an equalisation of the retirement ages of men and women by raising the retirement age of women from 60 to 65. Already incentives exist within the state pension scheme to delay retirement up until the age of 70. The pensions commission may recommend that no upper age limit be placed on retirement ages. Of course, capitalists conceive of retirement as a period of life when workers are too old and decrepit to contribute usefully to the labour process. Capitalist theory does not envisage retirement as an extensive period of productive life outside the process of producing surplus value. So, as people live longer, the logic of the economic system is to force workers to delay retirement and continue working. Discrepancies in the health and life expectancies of different social groups mean that manual workers in particular are being asked to work pretty much until they drop. For socialists the argument for a lower retirement age does not mean that we wish to throw older workers on the scrap heap. On the contrary, we see retirement as a period of a person's life when they should be able to engage in a range of fulfilling activities and truly express themselves as human beings. This is only possible if retirement occurs when a person is relatively healthy and vigorous. Extending the period of 'retirement' is part of the socialist objective of reducing the proportion of everyone's life that is spent in socially necessary labour (whether in a capitalist or socialist society). For socialists the increase in social productivity as a result of the development of labour-saving technology should increasingly be devoted to creating greater periods of 'free time'. This can be achieved by reducing the working week and encouraging frequent sabbaticals, as well as lowering the retirement age. Only in this way can everyone develop as a fully rounded human being finding self-expression in a range of talents. Of course, the full realisation of the potential of technology and social productivity must await a socialist society. Current arguments over the age of retirement are yet another vivid illustration of the failure of capitalism to serve the interests of humanity. Nevertheless, the struggle over the length of time that workers must work is as old as the struggle between workers and capitalists over the distribution of the social product. Socialists should be urging workers and their organisations to engage in a vigorous defence of current pension rights, while making the case for an even lower retirement age. It is capitalism that actually throws older workers on the scrap heap. Levels of unemployment among older workers from their mid-40s onwards are a scandal. The failure to tackle age discrimination or provide decent facilities for women workers makes a nonsense of the scare-mongering about workers retiring too early. Public v private provision The facts of a rising population of older people in Britain up until approximately 2050 cannot be denied. So how can society afford to support old people? In 1997 New Labour spoke of reversing the current 60-40 split in Britain between state and private pension provision. So, is the neoliberal solution of an expansion of private provision the answer? The need to increase social resources going to pensioners implies no such logic. Britain has experienced similar demographic changes in the past. The number of over-65s increased from 1.5 million, or 5% of the population, in 1901 (at about the time Lloyd George was contemplating the introduction of Britain's first state pension) to 4 million, or 9% of the population, in the late 1940s when Beveridge's national insurance scheme was being introduced. The increase in the number of old people over the next 40 years (from 16% to 23% of the population) is a one-off step change rather than the start of inexorable trend. Even the statistics deployed to support a shift to private pension provision hardly suggest a crippling rise in taxation. In France it is predicted that maintaining current levels of state spending on pensions will require an increase in spending from 12.1% of GDP now to 15.8% in 2050. In Netherlands the equivalent rise is from 7.9% to 13.6% and in Germany from 11.8% to 16.9%. For that matter, Britain already provides a model of a pension system relying on weak public provision and a substantial network of private schemes. The omens for European workers faced with a future in retirement based on anything like the British system are not good. The 1980s and 90s witnessed the scandal of the mis-selling of private pensions that took a massive proportion of workers' contributions in administrative charges. The insurers, Equitable Life, have gone through a slow-motion collision with the realities of their investment decisions before horror-struck savers. Nevertheless, until recently Britain's occupational pensions schemes were seen as a success story - a story Britain's trade unions were keen to promote. Indeed, the pension savings of British workers support the second biggest pension fund industry in the world (the United States is the largest), disposing of funds worth close to £1,000 billion. Over the last four years, however, that system has been in crisis. And it is British workers and pensioners who are paying the price. In the 1990s returns on equities (stocks and shares, as opposed to government bonds) averaged 6% a year in real terms, yet today it is estimated that the aggregate deficit of Britain's pension funds is in the region of £120 billion. The precipitous fall in the stock exchange since the turn of the millennium explains part of the deficit. Pension fund managers also complain about recent low interest rates. But the 'contribution holidays' companies took from paying into their workers' pension funds account for a large proportion of the deficit. It is estimated that over the period 1988-2002, when funds were in surplus, those companies now nursing deficits withheld contributions of £27 billion (which would be worth even more today if they had been invested to the advantage of fund members). Pension fund surpluses were also used throughout the 1990s to fund the laying-off of workers via the euphemistic device of 'early retirement'. So 36% of funded pensions are currently being paid to people below the state retirement age. Yet company bosses have not been held to account. On the contrary, shareholders have applauded them for taking swift action to remedy the looming crisis. Between 1995 and 2000 16% of defined benefit schemes were closed to new members. Since then the pace of closure has quickened. By 2003 it was estimated that 63% of final salary schemes were closed to newcomers and 9% were accepting no further contributions even from existing members. The closures have continued since 2003, suggesting that over the past decade we have witnessed the death of defined benefit occupational pensions in the private sector. Where companies have set up replacement pension schemes, these have primarily been defined contribution. And employers have cynically seized the opportunity to cut the contributions they make to the workers' schemes. Employer contributions to pension funds averaged 11%-14% in the old defined benefit schemes. Today employers are contributing in the range of 4%-7% to defined contribution schemes. Not only will workers have to depend upon the performance of the stock exchange to deliver decent pensions, but they will do so with less than half the previous level of financial support from their bosses. It is a variation of this discredited pensions system that, according to the claims of the neoliberals (and apparently of the TUC), is supposed to deliver a secure retirement for pensioners retiring 40 or 50 years from now. But what of the argument that the demographic changes require workers to make arrangements to save for their own future, rather than rely on the generosity of future generations of workers? The pensions commission itself is careful to warn against expectations that funded pensions provide an easy solution: "It is a delusion to believe that funding pensions magically reduces the challenge of an ageing society" (Pensions: challenges and choices October 2004, p12). For, however pensioners have established their rights to an income in retirement, the pensions they receive still represent a claim on the product of current workers. After all, do not place into storage the actual products that we will find useful in our retirement years. Funded pension schemes build up financial assets. But these are only of any value if they produce a flow of income (either from dividends and interest payment or the sale of assets) when workers retire, possibly half a century hence. Assets are only worth anything if there is a willing buyer and dividends are only paid if workers are producing surplus value. And relying on private investments to resolve the 'challenge' of changing demographics carries considerable risks. First, it is proposed that current workers raise the proportion of their income that they place in pension schemes of one sort or another in order to secure a pension in several decades time. In other words, the 'savings rate' of the current generation will rise and current spending (as a proportion of income) will fall. This has the advantage from the point of view of capitalists of transferring resources from workers to finance capital, but it also has a potentially depressive effect on economic activity. Some financiers are complaining already of a capital glut with insufficient opportunities to invest. Japan, for instance, has suffered economic stagnation for the last decade and a half, in part because Japanese workers have rejected the blandishments of their government to spend more of their income and save less. Now in a worldwide economic experiment it is proposed that workers everywhere are encouraged (or compelled) in a collective sense to become more 'Japanese' in their spending and saving habits. As a consequence, the global capitalist economy may become more 'Japanese' in its lack of economic dynamism. Second, starting in a couple of decades, a relatively large population of pensioners will be expecting to cash in their pension rights over a period of 20 or so years of retirement. At the same time a future workforce (that will be no bigger and may be smaller than today's) will be seeking to build up equivalent pension rights over a working life of 40 years or so. The mismatch between the rate at which assets are being spent and accumulated in the mid-21st century may well apply a long-term downward pressure on returns from the stock market. Adair Turner's pensions commission highlights these possible effects and in its calculations reduces predicted stock market returns by 0.5%. Other commentators have raised the possibility of an 'asset price meltdown'. The effects on pensioners dependent on the returns from these investments would be devastating. Whatever the future course of investment returns, just the last few years have demonstrated the volatility of the stock exchange. A worker in a defined contribution pension scheme who retired in 1999 at the London stock market peak of 5,900 would have received a very much better pension than a worker who retired a year later when the stock market had lost almost a third of its value. Forecasting the outcomes of investments over the next 50 years is an even more hazardous basis on which to build the pension entitlement of a whole generation of workers. A socialist alternative Socialists support the struggles of workers to defend their current pension schemes. In particular, we urge the strongest possible defence of the pensions paid to public sector workers - no raising of the retirement age, no cut in payouts. However, Britain's private funded pensions are in crisis. Even the most unlikely characters are springing to the defence of the minimal state pension. Michael Howard in the general election campaign proposed to link the basic state pension with earnings. Admittedly, the Tories see this as a device that, by eliminating the pensioner poverty trap, will encourage the lower paid to contribute to private pension schemes - along with a 10p increase in tax relief on private pension contributions. Others, such as the National Association of Pension Funds, are proposing a citizens' pension set at the level of the minimum income guarantee that, rather than being based on national insurance contributions, would be paid to everyone resident in Britain. Again, support for the citizens' pension is designed to remove perceived 'disincentives to save'. Socialists should place the concept of a citizens' pension at the centre of our proposals for transforming retirement. Not a citizens' pension set at poverty levels, however - the minimum income guarantee provides an income of just over £5,000 a year - but a citizens' pension that pays out a high proportion of average earning. A reasonable level would be at least two-thirds of average earning: ie, £14,000-16,000. On top of this, a second state pension could pay a pension based on earnings in work in order to ensure that living standards in retirement match those pensioners enjoyed during their working lives. A second state pension should aim at income replacement levels of 80%-90%, as do the most generous European systems, up to a cut-off point of approximately twice average earnings. As with the citizens' pension, the second state pension should be non-contributory and implemented immediately to ensure that current pensioners can immediately be removed from poverty. Inland revenue records can be used to calculate payouts - based on the best 10-20 years of earnings. The system would be highly redistributive - poorer pensioners may well receive an income that exceeds their income in work. Of course, far from encouraging savings in private pension schemes, a socialist pension policy removes all incentives for most workers to save for their retirement. What would become of existing pension funds? Some on the left, such as left academic Robin Blackburn, advocate a campaign by workers to take control of the pension funds into which they pay their contributions. Currently, the question of who owns and controls company pension funds is a murky area that employers have generally exploited to their own advantage. Blackburn proposes that workers seek to direct the investments made by the pension funds to achieve a range of desirable social goals, including preserving 'British jobs'. There is a strong corporatist element to his thinking and, shall we say, it is not clear that his proposals would help workers to advance to a socialist society. Furthermore, the pensions of British workers would continue to be dependent on the performance of funds based either on individual companies - or at best whole industries. Capitalism cannot guarantee that these companies or industries will survive for the 40 or more years that will elapse before the youngest of today's workers retire. Over the last decade the pension funds and insurance companies that own half of the shares on the stock exchange have failed Britain's workers and pensioners. Further scandals and failures lie in wait over the coming decades. It is true that many trade union leaders and officials, who have invested so much of their bargaining energies into preserving the system of company pension schemes, will resist socialist proposals to collectivise the provision of pensions. However, this is an example of the reformist role of trade unions in a capitalist society blinding the union bureaucracy to the real interests of the workers they represent. A socialist strategy would bring the pension funds and insurance companies into social ownership as the first stage, not only of building adequate pensions for the retired, but of the construction of a socialist society.
Worker