Fool's Eye View

[ September 27, 2000 ]

Gordon's Pension Problem is our Pension Problem

By Rob Davies (TMFEssex)

Carburton Street, London -- This year the state pension for an individual increased by 75p to £67.50. Not surprisingly that upset a lot of people, mostly pensioners. And these days there are a lot of them, 10.7m according to the Government Actuaries Department. So the "grey vote" is important to politicians and has to be kept sweet.

But Gordon Brown, the Chancellor of the Exchequer, also has to balance the nation's books. He has to ensure that the Government doesn't spend more than it earns. And, to be honest, he is doing at good job at that. What is more difficult, though, is to make sure that continues into the future, and the pension problem is going to make that difficult. You see last year the DSS spent £33.6b on the state pension, which is a pretty big number. But the forecast is that the pensioner population is going to increase to 16m by 2040. So even if the pension is not raised at all the national pension bill is going to increase by 49% to £50b.

That can be funded either by taxing us more, and the fuel crisis showed we aren't keen on that, or by borrowing. However, it is generally agreed that while borrowing is OK for capital investment it is not a good thing for current spending. So it is going to have to be taxes. But there is a problem with that because the working population does not increase at the same rate as the retired. To use the demographic jargon the support ratio, that is the number of workers supporting each pensioner, will decline from 3.4 to 2.5. So higher taxes will have to be paid by fewer workers. Ouch. That doesn't sound too good.

All this is before we talk about any increase in the pension. Assuming the pension increases in line with inflation, in other words we get more of those 75p increases, the pension bill will rise to £50b. Gadzooks, that is a lot. But the actuaries have also estimated what the bill would be if the pension were increased in line with earnings, as many people would like. The answer is a mind-boggling £169b. There is simply no way this or any other government could fund that level of expenditure. No taxation policy would be acceptable that would cream that much money from the working population to the retired.

Nevertheless, the Government needs to address the political fallout over the small rise in the pension. One way of doing that is to increase the Minimum Income Guarantee (MIG). Currently this £78.45, for an individual, but the Chancellor has promised to raise this to £90. Now this is where it gets interesting. Everyone is entitled to the state pension. A man has to have 44 years of contributions to qualify for the full figure; a women only 39 years. But the MIG can be paid to anyone, irrespective of his or her contributions record. But the big difference is that the MIG is means-tested. That means if you have other income, or assets of over £8,000, then you probably won't get it. The pension credit talked about this week won't come in for three years. But it will try and get round this problem that someone with a small amount of savings is actually no better off. If, for example, they had income from savings of £12 a week they would be no better off than someone on MIG. Under the new scheme they will be allowed to keep 50p of each £1 of benefit, rather than losing the whole lot.

Most pensioners therefore won't be eligible, but anyone who finds themselves with nothing but the state pension can apply for their pension to be topped up to the MIG level. Although it will take some time it seems clear that the universal state pension is going to wither on the vine of inflation, and the means-tested MIG will gradually take over as the principal means of support for the poor. This seems logical. After all, the fundamental problem for pensioners is not that they are old, but that they are poor.

All this of course is pretty bad news for anyone who was thinking about relying on the state pension to fund his or her retirement. At the moment the state pension is 15% of the average wage of £445 a week. On the projection of the Government Actuaries it is going to fall to 6% of the average wage.

No Government will spell this out, so we will do it instead. The state is walking away from providing an income for the retired as fast as it decently can. By shrinking the pension in real terms, it is moving the onus on to the individual to fund his or her retirement. The other measures announced by Mr Brown this week are short-term actions to get round the current difficulties, but it is clear that this Government, and probably any Government, will not restore the link to earnings.

Basically, you can forget the cradle-to-grave welfare state. We simple can't afford it. It is up to you to provide for your own retirement, because no one else is. Now, where is that ISA application form?

Where Next?

For comfort on this issue try the Pensions or the retirement investing discussion boards.