Pension provision in the UK has been a mess for a long time. Here we will look at the most critical mistakes.
First, means testing destroys the incentive to save for a large section of society. Why save when the state guarantees a minimum pension and whatever you do save is partly taken from you. If the government is serious about people saving for their old age, and they should be, then they should at least not penalise you for doing so. There is even a case for positive pressure to save, such as state contributions dependent on your own, not tax cuts which favour the richer elements of society. The people who are worst affected by this stupid policy are those who try plan for a life better life in old age, but do not have the means to save a lot. Those that benefit most are the spendthrifts who should be discouraged. Naturally, the politicians and the public sector have been very generous with our taxation when comes to their own pensions.
Second, the value of the pension is not directly coupled to the amount saved. There is a need to feel that whatever provision you do make will be directly represented in your pension. It should not be left to the state of the stock market on retirement day, or the hope that your company pension scheme does not disappear as you retire. Whether pension provision is by the state or the private sector, a guaranteed minimum growth is essential.
Third, the arrangements that control pensions are too complex. Savers need a simple one-stop government run web site that allows them to see at any instant how much their pension is worth. Likewise saving should be equally easy, ask the government to take more in taxation or pay a lump sum, and then tell them where it is to be saved, or accept default savings vehicles. The government can deal with the complexities of regulation, guarantees, and tracking multiple funds.
Fourth, state pension savings are spent not saved, because of the assumption that the population will continue to grow and people will not live any longer. These assumptions are wrong, and so we are heading toward a massive problem, where the state has spent our savings, we need more than ever before because we live longer and the population has stabilised and may soon start to fall. What will happen when there are no savings and fewer workers than retirees to tax for the pensions?
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Misdirected Spending
Monday, March 1st, 2010It is easy to look successful when one is spending someone else’s money, especially when one can also spend what they have yet to earn. Regardless of the sanity of that government policy, it is misusing the revenue from current and future taxation. Government spending is poorly directed toward encouraging retail spending and funding a bloated, overpaid, and inefficient public sector.
As much of what we purchase comes from other countries, some of that money flows out of the country and so retail spending is not good value for money. The public sector is notoriously bad value for money and some of it is not involved in fulfilling needs and wants. The public sector is funded by the private sector and so it should reflect the ability of the private sector to pay for it. Savings from downscaling the public sector should be redirected to stimulate the private sector. The most direct way would be to reduce costs to operate businesses, especially in employing people. This could include suspending the minimum wage and many other employment rights that discourage companies from employing people. While infrastructure projects improve the short term prospects of some companies, their total value is spread over a long period, so they do not achieve the best immediate effects.
Encouraging already highly indebted people to spend more on products that worsen the balance of payments, and using their future earnings to do so is not a sane policy. It seems the obvious needs to be stated, debt is not good. In broad terms, the reason we have problems now is because of excessive debt being used to inflate asset bubbles and the lack of confidence in the ability to service those debts. We need to deflate those asset bubbles, reduce debt, and diminish the chances of both recurring in the future. Policy needs to recognise the basic human traits of greed and hubris to restrain those that succumb to them. Free markets will always allow some to take advantage of others. They enable high wealth disparity which leads to a range of problems.
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Update 2010-03-09
Confirmation from the Office for National Statistics via the BBC that encouraging spending is not the panacea.
Tags: asset bubbles, employment, greed, hubris, inefficient, minimum wage, panacea, private sector, public sector, recovery, spending, statistics, taxation, value for money
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