The government announced on Monday the revival of the so-called (in its words) “landmark” Pensions Commission. It stated that this is required to address the fact, as things stand (in their estimate), that people retiring in 2050 will be 8% worse off than today's pensioners.
In the same announcement, the government celebrates the supposed success of automatic enrolment in increasing the number of people saving into pensions. However, it failed to ask the most important question of all, which is why, despite all this, the pension system is still heading for failure.
Let me unpack what's really going on.
First, the government's thinking remains locked into the idea that saving in financial assets – primarily shares and bonds – is the best way to secure income in old age. This assumption is that these assets will consistently generate sufficient returns, including gains, to support the increasing number of people in retirement. However, this belief is a fiction, particularly in a failing neoliberal world that is facing a massive change in demographics and climate change, which will fundamentally alter the value of many existing companies.
Second, the stock market is not a benevolent machine that delivers pensions out of the goodness of its heart. It is a speculative, extractive mechanism whose real returns over time depend on the next generation of savers pumping in even more money to keep the whole thing afloat. That's not a pension system. That's a Ponzi scheme dressed up in pinstripes, which is bound to fail as the number of people in the younger generation declines, as we know it will.
Third, if the current system was working, there would be no need to relaunch this Commission. The whole reason that this announcement was made is because the system is clearly failing. Millions of people – especially the self-employed, ethnic minorities, low earners and women – are falling through the cracks, as the government admits. This failure is not accidental. It's baked into the savings-backed structure. It also reflects the choice of those who have an option to avoid what they see to be a failed mechanism for pension provision, which is something the government refuses to acknowledge.
Fourth, while the government talks about the “success” of auto-enrolment, what it really means is that more people are being forced to direct more of their wages into propping up the financial system in what is, in effect, a forced additional tax payment, without having anything that actually guarantees them a decent retirement. Half of workers contribute only the minimum. Many save nothing. And who can blame them, when they are, in reality, struggling to make ends meet today?
Fifth, let me be clear about where this leads. The government will almost certainly conclude that retirement ages must rise again because, under this broken model, it's the only way to delay the inevitable shortfall built into the system they are creating. So once again, the burden will fall on ordinary people, not on those who designed this failure.
There is, however, an alternative, but it requires revisiting first principles.
The real pension contract, as I argued recently, is not about financial assets. It's a social contract between generations. Those in work today support those in retirement, in the expectation that the next generation will do the same. This has always been the only mechanism that works, and it depends on intergenerational trust, not share prices.
This government announcement pretends that private savings will solve a problem that is fundamentally collective. It ignores the fact that the economy has already failed to deliver decent wages, housing, or stability to today's workers. It now wants to push them into feeding the City with more cash, all for the illusion of future security.
We need a system that puts the wellbeing of people before the returns of financial markets.
So what should be done?
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We need a living state pension that guarantees security in retirement for all, paid from tax revenues and is not one dependent on luck in financial markets.
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We need a radical rethink of wealth taxation so that those who have accumulated assets contribute to the needs of those who have not.
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We need investment in care, housing, and services that actually sustain older people, not more financial products that enrich fund managers.
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And we need to stop pretending that a broken model can be made to work just by relaunching a Commission.
Reviving the Pensions Commission may provide cover for hard decisions yet to come. But it is not a solution. We need political courage, not another technocratic review, to say what must now be said: the financialised pensions experiment has failed.
It's time to fund retirement as part of a just society and not via a speculative game that is inevitably destined to fail.
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Given the above, and that private pensions are vast pools of ‘dead’ money as it is not in circulation, and that (contrary to what we hear from politicians) state pensions do not disappear into a black hole but in reality are spent creating significant economic activity and a reclaimed fairly rapidly through taxation, is there not an argument that lowering the state pension age and increasing it could result in major benefits to the economy as a whole?
If so, what would be your thoughts on a retirement age?
It may be essential in the face of AI
There will be fewer jobs
It will make sense to reduce the pension age to ensure jobs go to thsoe who need them most as a consequence.
It is a question of allocating and distributing resources. Much like food and water in Gaza.
Our £2.8 trillion GDP could be £40k per person. But it isn’t. So what is the minimum that a person needs to survive and thrive? Call that a pension when you are older, and universal credit or a national minimum wage when you are younger. Or withhold the necessary resources and people will die.
If you push the pension age downwards, perhaps even to nil, that is in effect a universal basic income. A national income for all. The is where we may need to end up if AI does almost all of the jobs and if we do not want all of the financial returns go to a handful of people that own the software. The ones with drones and guns. (Although query who can afford to buy anything from them.)
But in a utopian world, we could liberate everyone from the drudgery of daily work and unleash creativity and compassion. As long as basic needs are met.
Or we could end up with a neofeudal society with robber barons controlling all the resources and huge numbers of peasants scratching around to survive.
Given that our basic state pension is one of the lowest in the OECD I cant imagine that we cannot afford a modest real terms increase.
As you have pointed out if we were to reduce the Tax Relief on Pension Contributions to 20% we could give every state pensioner about £1000pa extra
I have also suggested the ability to buy about £3500 pa in extra state pension which based on what you have to pay to buy extra pension in public sector schemes is about £49000 so if everyone had to put 8% of earnings into that until they had bought that which I suggest most people should manage that gives most pensioners about £17K pa
Not largesse but it could be worse
A quick question, if I may, regarding reducing tax relief on pension contributions to 20% (which I have seen Richard suggest elsewhere): How would this work for people who might anticipate that they would be paying 40% (or, effectively, 30%) marginal tax when they come to withdraw that pension? On the face of it that would seem be a big disincentive for them to save in this way at all. Maybe that’s the point?
I think you are ignoring tax freee accumulation in the meantime and the 25% tax free element
Put those in and the equation is likely to be about tax neutral.
Why should it be anything else? For the wealthy, why should tax change their savings choice?
With (genuine!) respect, I didn’t forget about either of those things. The “effectively 30%” in paretheses in my post, took the hypothesised marginal rate of 40% and applied the 25% discount for pension withdrawals. So the rate at withdrawal would effectively be 30% for higher-rate tax-paying pensioners. That really doesn’t incentivize them to invest at 20% tax relief. They would take £100 of earnings, get £60 after tax, put it in a pension at 20% relief, giving £75, of which they would receive £52.50 after 30% tax at withdrawal. Surely better just to invest the £60 in the first place.
Regarding the accumulated earnings, I was assuming that the alternative was an ISA with the £60, that would also protect capital and accumulated earnings. The original £60 in an ISA would always beat the £52.50 from the pension, other things being equal. Now, you may say that there shouldn’t be ISA protection available, either not for anyone, or just not for 40% marginal tax payers. That might be right, but even in that regime the people I’m talking about still wouldn’t bother with the pension, I think. Any money accumulated in such a pension is either likely to get taxed at the effective 30% when withdrawn, or end up subject to inheritance tax at 40% if not withdrawn. In either case, they’d be better investing the original £60 than putting it in a pension with 20% tax relief.
(Disclaimer: You are an accountant, of course, and I am not, so that might all be nonsense!)
You’ve clearly thought about this. I think you’re ignoring time values of money, the value of employer contributions and more, but if these were contributions by a self employed person the choice would be marginal. I am entirely happy with that for two reasons. First, self employed pensions of this scale are rare, and employees would gain, and secondly, why are we subsidising the savings of the wealthy?I think that is your professional field.
Richard,
Glad that you covered this. Labour don’t seem to realise people reliant on foodbanks have nothing to put by for their retirement.
Yesterday I saw Craig Murray post on X that whilst the triple lock would survive, Liz Kendell will be proposing that 68 year olds would only receive 25% of their full state pension, rising to 100% if and when they reach the age of 72.
If this turns out to be the case, perhaps the expectation is that more future pensioners taper out of work. I don’t see that working with more jobs being replaced by automation and AI.
The case for UBI has never been stronger.
I’m not in favour of a Universal basic income (UBI). I’d rather see a government job guarantee, which has these benefits:
1 Communities get what they need
2 People are valued and improve self-esteem
3 Workers pay taxes
4 Workers improve their skills
5 No benefits/welfare are needed
More on my own web site here:
https://www.mmt.works/mmt-full-employment-and-the-job-guarantee-jg/
How could benefits ever not be needed? I am bemused by that , Ian.
I’m in favour of benefits, but would prefer a job guarantee in preference to a UBI.
Maybe they are not mutually exclusive.
UBI is near impossible, I thino, in any meaningful way.
A guaranteed base income is possible.
A JG? Ho do you deliver it? I just cannot see it working in practice. It is MMT’s ‘looks good in theory on a whiteboard’ moment.
“Liz Kendell will be proposing that 68 year olds would only receive 25% of their full state pension, rising to 100% if and when they reach the age of 72.”
Is this true?
I haven’t read this, but if so, then for many, she is basically wants to raise the state pension age to 72.
I assume the tier steps to 100% at 72, would be something like 25%, 50%, 75%? Of course, this would immediately put many retirees at 68 into poverty, and having to claim whatever benefits they can.
How could it not?
25% of the state pension? That’s about 50–60 quid a week. Try paying the rent, council tax, water rates, gas, and electricity on that. Don’t think about eating, starvation is part of the plan.
She would be responsible for creating a whole new level of pensioner poverty.
It looks like a backdoor way to get more people to not retire until 72, and to carry on working — assuming they can. After all, who is going to retire at 68, for 25% of the appallingly low state pension?
The idea that anyone can live off 25% of the state pension is the politics of the madhouse
But it does look like one of those mad schemes to raise the retirement age by the backdoor, while being able to say that people can still retire at 68 if they want. If this was introduced, many will have no choice but to carry on working.
It is the sort of thing the Tories would do. Well done, Liz.
This is one idea I have seen floated – you transition to requirement apparently getting there at 72. The claim is you get5 a pension at 68. Except you don[‘t of course. You can just see Labour loving that, can’t you?
She is an exceptionally wealthy woman, I would add.
There could at least be a Universal Basic Pension, even if UBI for all was considered beyond the pale.
Last night, I heard about this Pension Commission, my heart sank.
Most people will understand instantly this is about cutting the costs of pensions and nothing more.
I completely understand that the current mix of state pension/occupational pension has not proved to be successful for all and is unlikely to improve for the reasons mentioned.
Perhaps successive govts have sort to emulate the arrangements the US middle classes have the so called “401”. But I note the US state pension is much higher than the UK equivalent at least in nominal terms.
I think only when the City influence is broken will people in politics & policymaking circles actually think more broadly about a sustainable state pension.
Intergenerational is often attacked because of declining birth rate but I’m sure it can be made to work providing we get the balance right.
Historically the UK chose a “pay as you go” model for State Pensions I suspect because it was the easiest to get off the ground. Other countries chose differently.
As you say Richard state pensions need to be prized away from the City.
Thanks
There’s absolutely no reason to encourage people to pour money into the stock market at a point where the market is clearly at an unsustainable high.
The time to invest (if you want to) is after a crash, not before. That’s when you can expect to see decent capital growth, if you’re very, very careful. It’s still a gamble, but the odds are better.
Much better for a sensible government to encourage people to invest in some form of National Savings – except then, of course, as you said elsewhere, “government borrowing” would go up & the idiots in think tanks would have a field day.
Pensioners have done their bit for society, especially those with their full 35 years “stamp”. State pension should be set to the National Living Wage (£20k) as a minimum value. Any private pensions over that to be subject to income taxation in the normal way. It can be afforded in ways that Richard has highlighted many times before on this blog.
Currently if you work,for example, from the age of 25 to 66 you have to pay 41 years of National Insurance, you cannot stop paying when you reach 35 years of NI contributions.
I have not been to find definitive figures but I am pretty sure many if not most pensioners pay way more than 35 year s NI although this is not acknowledged by any political party.
“paid from tax revenues”? Have you read your own blog? How do taxes pay for anything?
OK – accepted – I can make mistakes
So, if state pensions are not paid from taxes, then I assume they are paid from new money generated by the Bank of England. Pensioners spending on housing expenses, food consumption, entertainment, etc. from the money they receive goes towards funding resources – production and employment etc. Any taxes paid on these pensions take money out of circulation, keeping inflation down. Have I understood this correctly?
Yes
‘A Ponzi scheme dressed up in pinstripes’ – you’re on cracking form today Richard. I should have added pensions to my list of economic education topics just now… another area where you’ve cleared the mud for me.
Thank you for all you do, look after yourself.
Thanks
I have written to the FT pointing out that anyone with a mortgage who saves as well is a serf to the financial services industry
The previous Neville-Rolfe review argues that there should be a cap of 6% of GDP on the total level of state pension spending, doing so predictably increases the retirement age faster…not the most popular plan
This will be madness and will be the subject of a video, soonish…
I well remember (for reasons that I can’t disclose) how a massive Ponzi scheme was by failure of regulation allowed to run. It was called Equitable Life. This should still be a warning.
As a woman who has paid into SERPS only to see it abolished and seen my state pension age rise 7 years since I started working, these ideas fill me with horror. We cannot keep expecting the younger generation to pay more in, whilst effectively taking away what they may get out because of some misplaced nostalgia of those born into the 40s and 50s. Working into your late 60s is already hard enough if you either have health issues, or like myself find it hard to get decent jobs at my age. Instead of pensioner poverty we are now looking at pre-pensioner hardship both financially and physically, with many struggling whilst waiting for hip and knee operations etc. Any solution that does not look at better taxation of pensioner wealth and the removal of unnecessary tax relief on those that can well afford to save for the future is dead in the water. You cannot keep raising the pension age and expect our younger generation already burdened by student debt and excessive housing costs to pay more for less.
Just one thing on point 5.
The raise in pension age will affect those propping up the broken system at the moment and as I alluded to when you had the poll on whether the state pension will exist, many people will not reach it at all. This is down to the decline in living standards, lack of services and degradation of them and the increasing of retirement. This is a form of enslavement of my generation and those that come after to essentially work until we die.
Many problems trace back to the City of London, at what point do we say it’s beyond saving and should be burned to ash? That doesn’t have to be literal before someone thinks I’m wandering off with a can of petrol.