[A-List] UK legitimation crisis: pensions

[Michael Keaney]

Interesting that the chief government actuary should publish a report issued
by "Politeia":

http://www.politeia.co.uk/

We've covered this outfit here before, but simply put it was set up in 1995
as a vehicle for the Michael Portillo ascendancy that never was.And since
then Portillo has toned down his machismo, emphasising his own brand of
compassionate conservatism, whilst his former acolytes and mentor (Maurice
Cowling) still hang around issuing the occasional missive. See

http://archives.econ.utah.edu/archives/a-list/2001/msg03911.htm

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British pensioners pay for Brown's rectitude

Government actuary's report shows that for the UK at least, the pensions
timebomb is not ticking very loudly

Phillip Inman
Monday December 2, 2002
The Guardian

State funding for pensions in Britain is lower than any other European
country's and even lower than that in the US, according to a report by the
government's chief actuary.

This presents a dilemma for Gordon Brown. While the funding needed to cope
with the increasing number of pensioners over the next 50 years amounts only
to an extra 0.1% of national income - a modest rise compared to mainland
European countries - it will ignite the already rising demands on the
chancellor for larger increases in the basic state pension.

According to the report compiled by Chris Daykin, the chief government
actuary, Italy heads the list of high spending countries with pension
payments that are more akin to a runaway train than the small incremental
rises experienced in Britain.

A spate of reforms in Italy in the last three years, however, has pushed
Germany and France to the head of the queue of countries expected to face
large funding gaps over the next 50 years.

Germany, which starts with a contribution rate of 10.3% of GDP in 1995, must
reach a rate equal to 13.7% of GDP to meet its present commitments to
pensioners - a rise of 3.4% that must be maintained until 2050. France faces
a funding gap of 3.3% from a contribution rate that is running at 12.1% of
GDP.

Italy remains tied to the highest commitment to state pension funding, with
a required contribution rate over the next 50 years of 18.5% of GDP. Despite
the reforms, which Mr Daykin describes as "substantial", the majority of
workers enjoy a retirement package that allows them to retire at 50.

The German government has instituted reforms that increase penalties for
early retirement and link state pension rises to annual increases in net
wages, rather than gross wages. France, however, has remained committed to
its "pay as you go" scheme that is based on compulsory contributions from
workers and employers and topped up by the state from annual revenues. Mr
Daykin says that the commitment to pay pensions equal to about 50% of
average earnings accounts for the spiralling pensions bill in France. It
compares with a situation in Britain where the state pays about 16% of
national average earnings.

In France, the plans to allow the development of a personal pension market
were quashed in 1996, although the election of President Chirac and a
rightwing government this year could bring a change of policy.

In his report*, Mr Daykin said: "Looking at the increases required in the
proportion of GDP devoted to financing social security, Germany can be seen
from this study to need to devote 3.4% more of GDP every years, averaged
over a 55-year period, compared to the position in 1995, simply to maintain
the existing social security system.

"The UK does not show this pattern, since we rely more heavily on the
private system, and because a considerable raft of pension reforms has
already been put in place."

As it is, the demands for an increase the basic state pension have not been
silenced. Last week, the centre-left think-tank, Catalyst, said the
government actuary's figures showed that a combination of low contribution
rates and a slower decline in the working population than predicted showed
that ministers could afford to increase the state pension from its present
level of £75.50 for a singe person.

It argued that many of the so-called reforms in pension provision in Britain
were based on fears of an ageing population and the economic burden this
would bring. It said that the "burden" had been greatly exaggerated.

Catalyst pointed to the reliance by many workers on their occupational
pension schemes to gain a decent standard of living after retirement.

In the last two years, these schemes have cut their pension benefits
considerably - switching from final salary schemes to cheaper, money
purchase alternatives.

Mr Daykin said he sympathised with arguments for greater involvement by the
state in pension provision, given the past record of mis-selling by banks
and insurance companies of private pensions, which could lead to moves for
compulsory contributions to occupational and private pensions.

He also believed the declining importance of employers in pension provision
stripped away some of "the advantages of the collectivisation of pensions".

But he said: "The arguments for the competitive private management of the
investments of are stronger."

*Pension Systems: The EU and Accession Countries by Chris Daykin, published
by Politeia; £7