The reality of the Pension Debt (To encourage discussion)

EdInvestor

One can equally argue as follows

jamesd wrote: »

a) A higher percentage of young people work than before: unemployment is lower than it generally has been and it's now routine for women to work.

And how much are the young people receiving in child benefit and family tax credits, not to mention housing benefit and free council tax, funded by all taxpayers including pensioners?

b) Yes, those taxes are helpful. Do you think that the estimated 15 million pensioners paying those taxes will pay the 33 billion annual bill in 2030 of linking the state pension to wages instead of inflation, 2,200 per pensioner?

At that point there will still be large numbers of pensioners with either no state pension or a very small one, mainly women so the cost won't be that high.

How about the 121 billion, 8,066 per pensioner, for the other basic benefits (basic state pension, additional state pension, pension credit, other pension benefits, housing and council tax benefits and attendance and disability living allowances)?

Few people will be entitled to these benefits: as far as means tested ones are concerned a third of those entitled now don't even claim and the numbers entitled will go down in future as more pensioners retire richer.

c) Most of the money pensioners have is either from taxes including NI or if in work or personal pension schemes is locked up in investments, with only about 5-7% of it being returned to the economy each year from those who stay.

What do you mean "returned to the economy"? You appear to be ignoring spending/consumption.Not to mention the substantial amount of pensioner assets in homes (usually owned outright) which can be mobilised if needed and other flexible investments such as ISAs and bonds.

Now, what about those who retire to Spain and take their money from the UK there - both the tax money paying the state pensions and their private pensions?

In many cases they will be taxed here first, but in any case, it saves on the NHS,right?

e) In 2006 there were 11.3 million pensioners, with the expected increase being 3.7 million by 2031. There aren't the 8.4 million immigrants it would take to get to even a 50% dependency ratio.

I think you may well find that quite a lot of these "new" pensioners are already on benefits, especially incapacity/disability benefits and carers allowances.Thus their switch over to receiving their income as a pension rather than a benefit will in fact represent a nil or very minor increase in spending by the Government.

g1) Here are the expected changes in the Pension Credit Standard Minimum guarantee, in 2007 prices.....That should make it obvious that the benefit levels are being hugely increased.

But numbers of recipients are being hugely reduced because the upcoming pensioners are much better off.

g2) To reduce the number of pensioners getting these increased Pension Credit payments, the plan is to take more of the NI from average and high earners and use it to produce an entitlement (not invested, paid for by taxes on the children and grandchildren) to flat rate S2P that increases the pensions for low earners, at the expense of decreasing the earnings-related pension the average and higher earners get.

This moves planned spending from the better-off (from whom it would be clawed back in tax) to the poorly off (who would claim it in benefits). The change may represent a saving to the Government.

I suppose changing the name of what they get from "Pension Credit" to "State Pension" means they aren't getting it as "benefits" but it's hardly a useful claim when the extra money still has to be found.

What extra money?

Ian_W

jamesd wrote:

But the 1970s and 1980s were the last 20 working years of those who are retired today.

Oy! jamesd don't you go pinching the first half of my working life willy-nilly!

High taxes:mad:, high interest rates:eek: , high inflation_pale_ ,
high wage increases :beer: - if you had a job! :rolleyes:

Oh, and BTW a female retiring in 1990 would be 77, a male 82 which with the best will in the world means a lot of them won't be retired - they'll be dead.

I'd be interesting in any data suggesting that it's distorted the US market, or that the relatively large sums invested by company pensions had done so for the UK market.

I didn't say I accepted that view or that it was right, only that it's a reason I've heard given. I have no knowledge about the US but I guess a UK NI Fund would probably be bigger than all the UK insurers put together so it's certainly a possibility.
My guess is that they never considered a fund, just continued with what had existed pre-1947. After all, the not inconsiderable costs of establishing an NHS and non-means tested dole, rebuilding a nation ravaged by WW2 and paying existing and fairly imminent pensioners - including war widows - probably meant starting a fund for future pensions wasn't on their radar.

have you, like me, read the reports of the Pensions Commission?

I have to confess I haven't but I have read the EXECUTIVE SUMMARY. Just remind us, what does it say about linking BSP with earnings? Means testing state pensions? Retirement ages? Establishing a new pensions savings scheme?

Overall the impression I formed of their recommendations was one of trying to create equity between the expectations of present and future pensioners and costs to future generations of taxpayers.
I must have got that wrong, as clearly you believe they have!

jamesd

EdInvestor, do you know that the Pensions Reform Factsheet I asked you to look at contradicts your points? Please look at it and respond either with arguments it doesn't counter or with the reasons why you don't believe what it's saying. Page 15 is the most interesting one, since it notes that far from your argument that it won't cost much, the tax cost is expected to rise in 2050 from 166 billion to 248 billion in 2007/8 Pounds.

Ian W, you know that's the Executive Summary of the Pensions Commission report, not the new Pensions Bill? Glad you've read it and I agree that it was a good examination of the issues - I found it very interesting (and worrying) reading. The open issues it left were how the cost was to be split between retirees (via contributions and later retirement), employers and taxes on those in work.

To answer your specific questions:

what does it say about linking BSP with earnings?: it gives the total cost for this, including the increase in Pension Credit SMG, which is also planned to increase with earnings and ends up a few Pounds a week above the total of basic and additional state pension (for a low earner). I gave the cost above in response to EdInvestor's claim that it's not going to cost much.

Retirement ages? Nothing substantial - that's already been covered in past changes. Not shifting soon enough or to old enough ages to have those who are retiring pay most of the cost, leaving too much to taxes on the children IMO.

Establishing a new pensions savings scheme? Not a lot about this in the Factsheet, other than some about how much it'll provide (not a lot above the greatly increased Pension Credit level for a low earner, so my guess is that low earners will opt out). Employee workplace pension setup. Won't be possible to transfer money out of it, so if the pensions included are poor or become poor you're trapped in a possible future version of the with profits fund mess. But at least you'll be able to opt out initially and avoid locking your money in. If your employer lets you without saying their contributions are only paid if you're in this one.

I'd much prefer raising the retiree incomes via later retirement and more in the pension savings scheme and less in the state pensions and taxes, so everyone has an incentive to use the pensions scheme or some other pension. The big shift in dependency ratio and increase in taxes worries me as someone who'll hopefully be retired at the time (rather then dead:)), but at the mercy of the tax payers being asked to pay much increased bills for a fair bit of my income. It's possible to arrange this now and I think it's irresponsible to pass the burden on instead of doing that. And setting the SMG so high seems to give a big disincentive to try to look after yourself, particularly for low earners.

EdInvestor

Perhaps you would like to refer to page 16 of the report jamesd, where you will see that if there was no change in pensions and benefits, the cost would fall from 6.1% of GDP in 2010 to 4.9% in 2050.

By giving an index linked minimum guarantee, the cost will rise from 6.3% of GDP in 2010 to 6.6% in 2050.

Not much to worry about there then.

jamesd

EdInvestor, thanks for looking. Now, as you say, the line in the without reform section "Total Pensioner Benefits" starts out at 6.1% of GNP in 2010 (90 billion) and falls to 4.9% (166 billion) in 2050. Hmm. Falls from 90 billion to 166 billion? I do hope that GNP rises as much as planned. Billions numbers from the previous table.

Now, on to the same "Total Pensioner Benefits" line in the c with other reforms section and you'll see that it says in the 2050 column 7.2% (248 billion).

Those other changes increase the basic state pension bill from 2.5% of GNP to 4.5% because they increase it to try to keep up with the Pension Credit level but it's not means tested, so everyone gets it. So the pension goes up while Pension Credit falls from the b case 1.2% to the c case 0.1%.

So we're looking at an increase from 6.1% of GNP to 7.2%. Now, the Tax Freedom Day discussion at the Adam Smith Institute mentions that taxes are 40% of their national income measure, so an increase of 1.1% of GNP would mean a tax increase of 2.9%.

Should I suppose that you're happy to vote for increasing the taxes on the generation after the baby boomers by 2.9% on the grounds that it's a small amount but not happy for those baby boomers to pay it because it's too much?

Why pass the cost on to that generation when those who are going to benefit can pay for the increase in their benefits themselves?

EdInvestor

jamesd wrote: »

EdInvestor, thanks for looking. Now, as you say, the line in the without reform section "Total Pensioner Benefits" starts out at 6.1% of GNP in 2010 (90 billion) and falls to 4.9% (166 billion) in 2050. Hmm. Falls from 90 billion to 166 billion? I do hope that GNP rises as much as planned.

Another interest ing example of the difference between flat rate costs and percentages.

Those other changes increase the basic state pension bill from 2.5% of GNP to 4.5% because they increase it to try to keep up with the Pension Credit level but it's not means tested, so everyone gets it. So the pension goes up while Pension Credit falls from the b case 1.2% to the c case 0.1%.

Indeed, so not a problem. Your extrapolation to tax increases doesn't really work IMHO.

jamesd

That assumed GNP rise is pretty interesting.

So how would you go from increased percentages of percentages of GNP to the increased tax rates required for the government to get that money from people?

EdInvestor

I'd have throught the small increase in tax to cover a rise from 6% of GDP to 6.6% of GDP could almost be covered by the rise in taxes paid by the pensioners themselves, as they will be more numerous and richer, and thus far more of them will be taxpayers than in the current generation.

jamesd

EdInvestor, you seem to have unrealistic expectations of pensioner income levels: absent these increases, fully 70% of pensioners would qualify for pension credit because of that index-linked increase in the SMG and the changes take them only a little above that level. That should make it pretty obvious how unrealistic your expectation that taxes on pensioners will pay much of the bill is: you don't get much tax revenue out of people on Pension Credit. A median earnier is expected to be getting around 12.5k and with the 10k planned tax allowance that's not a lot of taxable income.

The cost is not 6.6% - it's 7.2% because the SMG change increases other costs as well.

EdInvestor

The average pensioner is on 14k now - and those retiring later are expected to be richer.Pension credit income is currently 6,200 p.a