Labour says it's launching a pensions review to make retirement more secure. But dig into the details and it's clear: this is about cutting costs, not helping pensioners.
• Higher retirement ages
• Forced private savings
• Risky stock market exposure
• Means-tested pensions
We are heading for a pensions crash. And the City of London will cash in before it all falls apart. We need a fair, state-backed pension system.
This is the audio version:
This is the transcript:
The UK government is going to review the future of pensions in this country.
Just before Keir Starmer sent all MPs off for their summer holidays, it was announced by Labour that they are very worried about the fact that, in their opinion, if people carry on saving for pensions the way they are now, every pensioner in the UK will on average, be 8% worse off in 2050 than they are now, and that they say has to change.
Well, I can't argue with the sentiment. I don't want pensioners to be worse off in 2050 than they are now, even if it's quite unlikely that I'll be around at the time.
But the point is that by doing this, they're relaunching something called the Pensions Commission, and we know what the Pensions Commission did the first time it existed, which was in 2002.
It gave us pension enrollment for people who are at work, which basically ensured that everybody who was not in a company pension scheme was pretty much compulsorily enrolled in a national pension scheme that required that they and their employer make a contribution to a pension fund month in, month out, and that pension fund put the money in the stock market.
In other words, the Pension Commission ensured that there was a massive boost for funds flowing into the stock market, but the one thing we do know is that 20-plus years on, the system isn't working because if it was, we wouldn't have a predicted pension shortfall by 2050.
So, what's really going on, and what is the government really saying when it has announced this review?
First of all, I think we can be very confident that they are very worried that there is a massive potential state pension liability coming up, which, at the moment, they cannot be sure that they want to fund, and therefore, they want to reduce the public responsibility for providing pensions by forcing that task onto individuals.
So, what they're going to do is say we must save more to cut the current £175 billion annual cost of paying pensions by the state.
Now they're ignoring the fact that, actually, the subsidy to pensioners already costs £70 billion a year; apparently, this doesn't feature in their calculations at present, but what they want to do is shift from state pension provision to private pension provision, even though that wasn't the headline message.
And what I think we can be sure will happen because this, again, is based upon the precedent of past Labour Party action in this area, is that we will see an increase in the state retirement age.
Rumours have reached us because Liz Kendall has spoken about this, that they're thinking about increasing the state retirement age to at least 68, but with people getting less than a full state retirement pension at that age, and in fact having to wait until they're 72 to qualify for the full pension entitlement, which let's be clear about it, is around £12,500 a year at present. Nobody is living in riches on that sum, but you're going to have to wait forever to get it in the future.
What is more, the plan is, and we know this from the whole preamble to the report that is being set up, that people are going to be forced to pay more into private pensions.
How do we know that? Because they talk about the fact that not everybody is saving, and they want to make sure they do.
And there's a third dimension to what I think is likely to happen, and that is the state pension will be means-tested if they want to continue to cut the cost of the state pension, even though they would've increased the state retirement age, and they will have forced people to save. The corollary of all of that is that they will ensure that those who have got a private pension will not qualify for the state pension, and, therefore, this saving that they're going to force you to do will actually reduce your expectation of a state old-age pension.
None of this sounds good.
None of this sounds as though this is going to make pensioners better off.
All of this looks as though it's going to achieve a very basic state pension for the very poorest, but otherwise, everybody will be dependent upon risky stock market schemes to provide their pension in the future, and that scares me rigid.
And the reason why is that those, I'm afraid to say, rather small-minded people who are running the government and who are running the Labour Party just can't get their heads around the fact that there are some fundamental changes going to take place in markets over the next 30 years or so.
Right now, stock markets are booming. The London FTSE 100 Share Index is at a record high level because of the exceptional returns currently being enjoyed by defence companies, because we're on a pathway to war, and because of the exceptional returns being earned by fossil oil companies, because they've said they're abandoning renewable energy when renewable energy is very clearly what we need, and because banks are making exceptional profits out of exploiting us all.
But those profits are not sustainable. We'll have either killed each other in a war, or we'll have destroyed the planet, or banks will literally have fleeced us dry. Whichever one of those it is, those levels of profit are not going to continue.
And there's a very particular problem, which is being entirely ignored by this plan, which is the fact that there are going to be fewer young people in coming generations. If everybody now buys shares and are using them as the basis for their pension fund, they will, when they get to old age, have to sell them to somebody. That's a simple, straightforward requirement.
How a saved pension works is that you maximise your savings at the time that you retire, and from then on, you basically sell the assets you've acquired to provide you with a pension. So, somebody's got to buy your shares, and there are going to be fewer people to buy shares in the future than there are now, and by then, people will have rumbled that war, bank exploitation, and fossil fuels aren't a good idea, and so they're not going to be there to buy the shares that people will want to sell.
In other words, if you look at what is going to be in-built into this new pension system, a crash is going to be inevitable. We simply won't be able to avoid it.
Pension values will collapse as a consequence, and people will not get the pensions they expect as a result.
The state will be unprepared, having wasted vast amounts of state money in subsidising this crash, because they will have done so through the tax relief provided on pension contributions, and people will be left over in poverty and will still need an income to survive. That's the crisis that we'll actually face if we go down the route that the Labour Party is talking about.
The only winners will be the City of London, because yet more money will be poured into their schemes and everything will appear to be great for the next few years because more and more money will be used to buy shares until the point comes when everyone suddenly says this isn't working, and that's when the crash will happen.
So this is a false narrative.
It presumes that pensions are all about personal responsibility, which is a core neoliberal idea, and that pensions are all about personal savings, which is another core neoliberal idea. The fact is, pensions aren't about either of those things.
As I explained in a recent video, which we'll link down below, there is a fundamental intergenerational pension contract which has to be honoured within any pension arrangement, and that is very simple. It is that today's workers fund today's pensioners in the hope that the generation who follow them will provide for today's workers when they reach old age. This is a fundamental intergenerational contract which transfers wealth between them. There is no other way in which pensions can be provided, but by a younger generation sacrificing part of their income to keep the older generation, of which their parents might be a part, alive, and that is the key that society has to recognise and which the neoliberal model does not.
It is only the state that can manage this intergenerational contract, in other words. 📍
Markets are incapable of doing it.
We need to renew that social contract, not boost the failed market ideology, which will give us a crash if things go the way that I expect and as I've outlined in this video.
So, in practice, Labour is going to be complicit in undermining pensions. It's not going to be creating better pensions for everyone. It's going to generate a major financial crisis and destroy pension value.
We are heading for a crisis driven by ideology, in other words, and it's time that we demanded a fair state-based pension for all instead.
That's my opinion. What do you think? We're going to put a poll down below. Do you think the future of pensions should be based on personal savings? Possibly enforced personal savings, or should we be looking for the state to supply an enhanced old age pension so that, as people on average in the UK get older, they'll still have the right to a state pension that they can afford to live off?
Have a look at the poll. Give us your views. This is important because what you think matters, and you might want to write your MP about this, and there's a link to assist you to do that in the blurb below this video.
Poll
What do you think about pension reform? Total Voters: 407
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Dusting off my PhD in the bleeding obvious and like you Richard I am close to retirement age and with three young sons.
I have two Local Government pensions & the New State Pension.
The State Pension is funded via Taxation (OK no it isnt but……..) however its possible for Government to decide where the taxation comes from.
The Local Government pension will be paid from income generated by the Pension Fund from Dividends, Rents etc ie another form of taxation levied on my sons however this will be a ‘private’ tax.
There is I suggest a serious question to be asked about the impact of ‘finance’ demanding returns from the real economy and this plan will only make things worse
Agreed
Through most of human history your pension investment was children…. and, essentially, nothing has changed. We can hoard/shuffle paper assets all we want but if we don’t make the world a better place those “children” (ie all working age folk) they won’t be able (or willing?) to look after us.
Yes, we all need to consume and save more. Yes, we need to direct those savings towards what our “children” will need.
You state this clearly in all your blogging on pensions…. is it really that hard to understand??
Apparently it is very hard.
Thanks for the comment – it hits the nail on the head.
I had a lengthy conversation with AI recently about a living state pension. I’ve just asked it for a bullet point summary of our deliberations. Here it is, if you’ll forgive some American spelling:
Here’s a concise summary of the issues identified in our conversation about removing private pension tax benefits and introducing a living State Pension:
* Financial Impact on Public Purse (Net Cost):
* Revenue Gain: Significant immediate increase in government revenue from removing income tax relief on private pension contributions and tax exemptions on investment gains within funds.
* Expenditure Increase: Substantial increase in government expenditure due to a £19,300 “living State Pension” for all eligible recipients.
* Initial Net Effect: The immediate revenue gain would likely offset a significant portion, or even all, of the increased State Pension cost, potentially leading to a short-to-medium term reduction in the budget deficit.
* Economic Multiplier Effect:
* The increased State Pension payments, particularly to individuals with a high marginal propensity to consume (pensioners), would lead to a significant multiplier effect.
* This increased spending would generate additional tax revenue (VAT, income tax, corporation tax), further reducing the true net cost to the Treasury.
* Impact on Private Pension Industry & Investment:
* Reduced Private Saving: Removal of tax incentives would likely lead to a substantial decrease in private pension contributions and overall private pension assets.
* Bloated and Inefficient Industry: This policy could force a highly criticized, fragmented, and often inefficient UK private pension industry to become smaller, more consolidated, and more efficient (e.g., lower fees, more transparent products), driven by competition for remaining private savers.
* Investment “Slack” & Long-Term Growth: A major concern is whether other parts of the financial system (e.g., banks, direct government investment, other forms of individual savings) could effectively take up the investment “slack” from a diminished private pension industry.
* Risk: Potential for reduced long-term, patient capital for infrastructure, venture capital, and other growth-generating investments, leading to slower economic growth and a smaller future tax base.
* Counterpoint: Other successful economies manage investment without large private pension sectors, relying more on bank-intermediated finance and public investment banks, suggesting it’s possible but requires careful transition and robust alternative channels in the UK context.
* Social and Political Implications:
* Improved Retirement Security: Significant benefit of lifting many pensioners out of poverty and simplifying retirement planning for a large segment of the population.
* Behavioral Changes: Unpredictable shifts in how individuals save and plan for retirement.
* Public/Political Backlash: High potential for strong opposition from those whose existing financial plans are disrupted by the removal of tax benefits.
* Overall Policy Trade-offs:
* A fundamental shift from a system that incentivizes private, deferred tax-based retirement saving to one largely based on current taxation for a universal State Pension.
* Weighing immediate fiscal benefits and social equity gains against potential long-term risks to national savings, capital formation, and economic growth.
I would never wholly rely on AI but it can suggest avenues for exploration, and does here.
It was a long debate and I challenged lots of the initial assertions. It responded well and we got there in the end.
Hmm, Cliff. That sounds like you beat up the AI until it agreed with you. Whilst a good tool to help you refine your own thinking, it doesn’t sound like it was really contributing much. Or am I being too cynical?
You may well be right KimSJ. It did come up, though, with some issues I hadn’t thought of. I think the point is that one can use AI to help flesh out a point of view. And points of view vary. That’s politics. Another example – I’ve noticed that the AI apps I use have a tendency to keep reverting back to “orthodox” economics unless I keep reminding them to stick with MMT. I think that me and AI got pretty close to the truth on the living pension, though! It needs to happen and the consequences need to be dealt with.
You are patient, very clearly.
I also think you are finding a valid use for AI.
Last night I watched the Southport documentary.
Along with wanting to jump into the telly and beat up some fascists and shake a few idiots into being more sensible all I could see was people caught up in a conspiracy – yes – a conspiracy for sure – to deny ordinary people the money they need to live and have the services that they need.
Fascists are fascists and a baton round or rubber bullet here and there for them I have no qualms with, especially these days when a meeting at a Quaker House can get you arrested and supporting Palestinians will get you thrown into jail even if you 80 years old or more. I felt that the policing in these events was very weak in the face of the far Right – as if they were tolerated. Immigrants could have died.
One immigrant thought that England was a crazy place that wanted to help him and harm him at the same time – what a life he must have had to say that!
But the conspiracy about having no government money goes on and on. One guy – talking straight out of the racist play book – could also have been speaking as a left winger or an advocate of MMT when he said that people are not being listened to.
What price divide and conquer? Injured policemen? Smashed up and burnt vehicles? Vandalised property?
One thing I know for sure: there are people in charge who do not give a fuck about any of us.
Poeple are not being listened to.
I can’t help but think back to 2014 and the Scottish Independence referendum. One of the (many) scare tactics employed by the Better Together campaign was “Where will the money for the pensions come from”, terrifying pensioners into believing that they would be left destitute in an independent Scotland.
The irony of this situation is not lost on me.
What I constantly fail to understand is why, in this country, the state pension is such a big issue. We spend around 5% of GDP for the state pension, whereas the OECD average is around 8%, with several countries such as Italy, Greece and some others paying much more (around 15%) as a share of GDP. Even the ultra-free market USA pays out just under 8% of GDP for their social security pension system. Why do we have to be right at the bottom of the pile? Only a handful of developed countries pay less state pension than the UK.
What we need, as a minimum, is a flexible state pension, with people being able to claim a reduced state pension up to five years earlier (much as what happens in the USA) and also the reference state pension to be increased to 50% of median full time earnings. We can finance this by reducing the huge incentives for highly paid people to avoid income tax by pumping vast amounts of money into private pensions, which are then hugely subsidised by the taxpayer in the form of tax reliefs. The 25% tax free ‘lump sum’ should also go as there is no justification for this. We can retain ISAs as a savings tool, but there should be a ceiling on the amount that can kept tax-free in such accounts. Lastly, CGT should be reformed, with the tax free allowance removed and rates of CGT to match the person’s income tax rate. These simple measures would enable the government to adequately fund a state pension that is fit for purpose – the current system is most definitely not fit for purpose.
Thanks
Read the Taxing Wealth Report 2024, I suggest.
What Labour/Kendal/Reeves don’t or refuse to understand is that pensioners spend most of their income back into the economy again this facilitating more tax take and stability in the economy. Private pension “investment” in the gambling den of the ,Stock Exchange only boosts asset prices forcing rents and essential products up and so lowering the quality of workers lives and reducing the ovrral purchasing power necessary for a civilised society.
The point about real assets being children is 100% correct. Sadly, short sightedness (as usual) from successive governments has meant we are having fewer children. Primary schools are starting to close down! The whole set up is mind boggling. For the first year you have maternity/paternity to look after them but you lose a significant part of your income, years 2 and 3 the nursery costs are high – even with the so called 30 free hours and Tax Free Childcare. Then when the children are old enough for school, the wrap around care is equally expensive. It’s like the state is doing what it can to stop people having children. But what is more tragic, are the comments on things like BBC’s Have Your Say where there seems to be a general sentiment of “why should I pay for your children”. In my opinion, Neoliberalism has turned us from a community into selfish savages.
Sadly, that seems to be true.
The climate crisis suggests that global population growth has outpaced our ability to sustainably provide for that population. Shrinking populations may be one possible way forward — we don’t seem able to reduce our footprint in other ways, even though calculations suggest that should be easy.
In such a situation, it seems undesirable to encourage people to have more children.
I will address this soon in a new video.
Maybe I am paranoid, but the system’s actions seem to point to:
non-workers are useless; pensioners even more so
reduce pensions and more old people will die, of hunger or cold
make it easier fot the poor to choose to die
take no action to change unhealthy diets
renters will not have the income to rent somewhere to live, and the care system will get even more overloaded.
Life expectation is already falling among the poor
Join the dots.
All this adds up to massive “we can’t afford anything else; it’s not our fault” It can also be interreted as a “war” on the old.
Much to agree with
Yes, it was hard for me to take it all in. I had been mystified by the workplace pensions I enrolled in, anxious about annuities and not keen on my lack of choice in what the funds invested in. All the information I had access to was jargon-filled sales guff. I stopped thinking about it. I thought my NI contributions went to ‘my’ state pension for ages.
Thank you Richard for laying it all out clearly. We must get pension provision out of the maelstrom of the finance industry. We all stand to lose if more pensions become dependent on stocks and other assets; pensioners of the present and pensioners of the future. The generational angle makes total sense now.
Everyone needs to understand this, not just those who get it instantly. Thank you Richard for revisiting the topic so those like me can grasp it too.
Thanks
This might need to be in the primer
Well said Prof
This seems to me to be more about the City of London’s needs, re-inflating this sick, failing corpse with easy money.
What about the pension scandals in the 1990s the 2008 crash, and as you say climate change ?
It’s just another industrial scale scam, forced upon us through a trumped up commission and the neoliberal sock puppets in Wasteminster.
The inter generational contract has been broken when the younger generation have to choose childlessness because they are financially broken.
Who will fund their old age?
Why should they support this pension generation when it is they have allowed a neoliberal nightmare to be forced on the young?
Many young people are saddled with student debt, renting for £15,000 a year for a basic flat, excluding utilities, council tax, food etc. Good jobs are scant.
Both parents now have to work, childcare is an unaffordable option.
So even their right to family life is denied.
This is an utter abomination along with housing.
I voted to increase the state pension but its not enough. Even if the state pension was increased to 50% of median earnings demand for a 2nd pension will persist because it still means a large fall in income at retirement for a majority of folk. We need to work out how to redesign the 2nd pension system so that it invests in the productive capacity of the economy so that the needs of all can be provided for in the future. It also needs to be designed to remove investment risk from individuals (DC pensions) and from individual employers (DB pensions). To do this needs a state backed national pension/wealth fund. This can be designed on a pay as you go basis with contribution income covering pension costs. Existing 2nd pensions could be absorbed into this over time. The resulting fund would be large enough to accommodate a buffer fund to manage cash flows whilst also allocating funds to direct investments in infrastructure and partnership stakes with private sector businesses.
If the state pension was earnings related and provides 50% of earnings the national pension fund could be designed to provide an earnings related (DB) pension of 40%. So for a full contributory history the combined pension could deliver 90% of earnings as a pension.
Thanks, Jim
The pensions commission smacks of “Treasury Brain” i.e. shorter-term cuts and damn the consequences.
To end the hopeless declinism that envelops the UK, one of the targets must be breaking up the Treasury
Agreed.
The answer is not more private pensions which only helps the finance industry. It is a better state pension funded by a much more equitable redistribution of the country’s wealth through taxation. I would guarantee the triple lock into the foreseeable future, but also consider gradually raising the pension age up to 70 from 2035 onwards, so that it would be 70 by2041. I’m against means testing- taxation already performs that function. Just let people know we’ll in advance that when they get old, the state will have their backs and protect their living standards first and last. Simple, clear promise.
I agree with you Mr Surtees that SP needs to be more generous, but why raise the pension age? I’m getting to the stage where my low-paid care work is getting physically hard, and going back to the profession I left years ago won’t happen – it can be hard enough getting employment after 55. I was in Norway this summer, and was told that retirement age varies for different types of work. It’s pretty harsh to end up on universal credit having to spend 35 hours a week job hunting in your late sixties A little more leeway please for those who are worn out or cannot find suitable work. Having a decent pension would free up some to volunteer, or mind their grandchildren for their overstretched children.
Agreed
Raising the pension age is fine for non-manual workers. I know 2 manual workers well, family. Both self-employed. The builder has just had his 3rd hip replacement at 52. The gardener is 43 and already has irreparable injuries and joint problems. Both will be lucky to be capable of working past 60. There must be many like them, though I’ve no idea how many. Raising retirement age would be disastrous for them.
Why is it fine for anyone?
And why can’t manual workers become non- manual workers?