The pensions myth – part one

Last week, the UK experienced the largest general strike in 30 years when public sector workers participated in a one-day stoppage of work, involving health workers, teachers, social workers and civil servants at central and local government.  The strike was over the government’s plans to reduce the value of public sector pensions while increasing the contributions that must be paid by workers towards their pension and making them work longer before getting it.  This would cut the value of public sector pension by over 15% while increasing to cost and work time involved in receiving them.  Given that top executives in the banks and big corporations, ministers in government and MPs in parliament are not taking similar cuts, millions of public sector workers are enraged at these ‘reforms’, as well as the majority of the electorate if public opinion polls are accurate.

The government argues that it is doing this, not to save money and reduce its deficits and debt (see my post, The best-laid plans of mice and George Osborne, 29 November 2011 ), but because the current pension system is unaffordable.  This is the pensions myth.  Let me deal with this myth in relation to the basic state pension or social security for retirement provided by the government in this post.  In my next post, I’ll deal with the issue of public sector pensions schemes.

Mainstream economists, politicians and pensions institutions are all agreed – existing pensions schemes are unaffordable and we must ‘reform’ them – and by that they mean reduce their value for those who have finished a lifetime’s work, make people pay more for them while they are working and make them work longer before retiring.  That’s what reform means in the 21st century in the richer capitalist countries   It’s another condemnation of the failure of capitalism.  It can’t provide a reasonable standard of living for those whose want to stop full-time drudgery in their later years.

The economists and politicians tell us that there is no alternative.  People are living longer and getting older, so those under the usual retirement age cannot deliver enough income to provide for those who need or want to retire.  If you don’t want ‘reform’, then you must cut resources for other things like healthcare or education.  You can’t have all these things properly provided by taxation and state spending.  This is the pensions myth.  And it is a myth.

There are enough resources if they are properly organised and fully used. It’s both a political choice and question of economic organisation.  Does a country want to use its resources so that people can stop work at the age of 60 or 65 and have enough income to live on in reasonable comfort, or not?  It can be done.  It depends on two things: first, that an economy creates enough resources and expands sufficiently to cater for its elderly population that may also be getting larger as a share of the population.  And second, given finite resources, pension incomes may have to be provided at the expense of other social commitments: such as bailing out the banks; arms spending; subsidies for private corporations to invest; lower taxes for top earners and corporations etc.

Of course, we are told by the politicians that it is a choice between good pensions or a good health service or education system.  But is that the choice?  The truth is that just a sustained 1% rise in the average growth rate in the major advanced capitalist economies could provide enough resources (and government revenues) to finance the existing level of state pension and benefits with something to spare.  Let me explain with some basic calculations on the UK economy.  The UK economy grows at about 2.25% a year on average (after taking into account booms and slumps, although this latest Great Recession means possibly an even lower rate ahead).  On that basis, the government says that the current state pension cannot be maintained without a real increase in the share of spending going to pensions at the expense of other needs, because the number of pensioners is rising fast (faster than real GDP growth) and the workforce available to create resources is shrinking relative those who have stopped work.

Well, state pensions (available to all men at 65 years or over and women at 60 years or over at the moment – but set to rise to 67 years for both by 2026) currently cost about £71bn in real terms, or 4.7% of UK GDP.  On the current estimates of the increase in the number of state pensioner units (as it is called to include married couples) from 8.5m now to 11.5m by the end of the decade, the cost will rise in real terms to £89bn, or 5.1% of GDP, while the average weekly value of that pension will fall from £160 a week to £148 per week.  This is the average weekly wage in real terms per pensioner unit.  The current state pension for a single male is about £110 per week.  So if nothing changes, the burden of paying the state pension for the economy will rise and the value of that pension to each pensioner will fall in real terms (after inflation).

But what if the UK economy’s rate of growth were to rise by an average 1% point over the rest of this decade?  That’s not much of an increase, with UK real GDP then growing at a paltry 3.25% a year – surely the capitalist economy could do that? (apparently not).  But with that rate of growth, the picture looks way better.  Now real GDP rises as fast as the number of pensioners grows and the burden on the economy actually falls from 4.7% of GDP in 2010 to 4.3% of GDP in 2010, while the real value of the weekly state pension rises from £160 a week to £164 a week (not much but it is a real rise).  So the increased number of pensioners has been catered for without any change in share of spending going to the state pension and with even a small increase in the real value of that pension.

But can we increase the rate of growth of the UK economy?  Is that not a forlorn hope?  Well, it may be under the current capitalist system of production where across Europe, there are now millions of unemployed youth up to the age of 25 wanting a job and not even having a college course and so are out of work.  In the UK there are now over one million such young people ready to work.  In addition, of the other 1.5m out of work who are older, most are not mentally ill, suffering disabilities or just lazy.  Most are also wanting to work.  If we can put these people into productive jobs, that could easily deliver a faster growth rate for the UK economy.

There are 30m people at work in the UK, which means that they produce new value each year of about £50,000 per worker.  The average wage for employees is about £25,000 a year, so the rate of surplus value appropriated by the owners of capital is about 100%.  But let’s be conservative: if just the one million unemployed young people were put to work and they generate only half the value created by the average worker because they are not so skilled or productive, even then the additional value to the UK economy would be worth 1.7 pts of real GDP growth each year.  So the average rate of growth to 2020 would rise to 3.9%.  On that basis, the burden of the existing state pension would fall from 4.7% of GDP in 2010 to 4.1% and the real value of the weekly pension would rise from £160 a week to £173 a week.  The graph below shows that the burden to the economy of the state pension (as % of UK GDP)  depending on the rate of GDP growth.  Without changing any of the existing arrangements (no ‘reform’), the pension burden would fall relatively and the value of the state pension would rise absolutely.  The pensions myth is revealed for what it is: if an economy grows fast enough, it can care for its older people, among other things.

Unfortunately, there is an extra problem.  The state pension in the UK as in many other ‘rich’ countries is pathetically low and not sufficient to provide a comfortable life for anybody who retires.  That is why it has to be ‘topped up’ by humiliating ‘means tested’ benefits from welfare and why most people who have been working must contribute on top of their taxes to the government, part of their wages to a pension fund run by their company employers (private sector) or by the government (public pensions).   In the case of the UK, the replacement rate (the ratio of the state pension to average earnings) is one of the lowest in the OECD,  just 33% in 2010 (on my calculations) compared to an average 50% in the richer capitalist economies.  That means that the average pensioner with just a state pension must live on one-third of what they were earning on average at work i.e. living in poverty.  Even a 50% rate is not great.  But if the spending on the UK state pension was increased over the rest of the decade to a target of 50% of average income by 2020, the cost of state pension on the UK economy, even with the faster growth of about 3.9% a year, would rise to 9.6% of GDP from 4.7% now – or more than double.  In the graph below, the first bar shows the current burden of the state pension as a % of GDP, the second bar shows what it would rise to by 2020; the third bar shows what a 50% replacement rate would cost now; the fourth bar shows what a 50% rate would cost in 2020 if the economy grows at the current trend rate; and the final bar shows what the burden would be with faster growth.

That could only be achieved if government and its electorate decided that they wanted to shift more resources towards pension incomes and away from other things.   Could this be done?  Yes, it could.  For a start, the government could raise a lot more revenue with a better and fairer tax system.  It is now well established that, through tax evasion (illegal) and tax avoidance (legal), Britain’s capitalist sector is not paying up to £70bn a year in tax that they ought.  Ending offshore schemes, accountancy tricks and downright fraud could deliver 4-5% of GDP in extra revenue and thus cover the pensions gap.  Also a more progressive tax system that taxed the rich more and poor less would yield more revenue.  Of course, having full control of that surplus-value appropriated by the capitalist sector would yield even more.

Then there is spending.  The UK government spends 3% of GDP on military spending to carry out campaigns in Iraq, Afghanistan and elsewhere and wastes billion on  procurement of military equipment.  Then there is spending on business incentives and subsidies, tax relief on private education and £37bn a year on private pensions (better used for state pensions), and of course, above all, the recent bailout of the banking system to the tune of 10% of GDP in straight cash.  A redistribution of government spending plus an increase in government revenues, without taxing the average household more, is perfectly possible and would yield the extra funds required to raise the state pension and increase other services too.

An economy that can grow faster and a government that organises its priorities for the people and not to protect and promote the capitalist sector can deliver a state pension that those leaving work can live on, without making people work longer, without increasing contributions and without reducing other public services.  Of course, it would mean a serious attack on the capitalist system of production and distribution. That is why it does not happen.  Instead, people wanting to retire over the next decade in the UK and elsewhere face living in poverty on a state pension and means tested benefits  or relying on a top-up from a meagre occupational scheme that they have paid through their company or to a public sector scheme.   Even then, the majority of those retiring will not have enough to live a comfortable in the last decade or so.  That’s because both the private sector (particularly) and government schemes are pathetically inadequate and are now subject to serious ‘reform’ too as part of the pensions myth.

In the case of the 23m people working in the capitalist sector in Britain, only 3.2m are in any company scheme anyway.  So they will have to live off the state pension and social welfare plus any savings (usually the value of the equity in their home) or through any personal pension scheme they have put money into.   I’ll deal with the issue of public and private sector pensions in another post.

One Response to “The pensions myth – part one”

  1. Mike B) Says:

    Workers produce all the wealth not already found in nature. There is NO reason why they can’t have sufficient surplus value back in the form of pensions to live on in their old age.

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