FLC079, Sufficient unto the Day: New Labour and My Pension, Sean Gabb, 27th November 2002
Free Life Commentary,
an independent journal of comment
published on the Internet
Issue Number 79
27th November 2002
Sufficient Unto the Day:
New Labour and My Pension
This Labour Government has so far been rather lucky in its management of scandals. There have been many of these, but they have done it no serious damage. This is partly because most of them have not affected large numbers of ordinary electors—mortgage fraud, embezzlement of public funds, perverting the course of justice, wars of imperial aggression, and so forth. Partly, it is because, even when large numbers have been affected—the handing of the foot and mouth crisis in the country, for example—the Government has faced no opposition able to make trouble. In the Conservative Party, it has faced a better opposition than even money might buy. There is, however, one scandal that may yet destroy it. This concerns the regulation of our pension funds.
I know less about this matter than I ought, but I am now pushing 43, and am beginning at last to take an interest in the how Mrs Gabb and I are to maintain our standard of living a couple of decades from now. So let me explain the scandal as I see it.
There are broadly two ways of organising pensions for the old. The first is a state managed "pay as you go" system. In this, the State pays today's pensions from today's tax revenues, and tomorrow's pensions from tomorrow's revenues. The system may be dressed in the language of insurance and contributions, but that is what it essentially is. Morality aside, this can work reasonably well so long as there are enough young people able and willing to pay the taxes needed. Let the demographic sums stop adding up in the right way, and the system collapses. The second system is private. Individuals, or their employers, or both, pay regular contributions to a fund. These are then invested via the financial markets to accumulate a sum of money, which is used on retirement to buy an annuity for one life or as many as may be agreed in the initial contract. This is a better system, so long as the contributions are sufficient to produce the capital sum, or are properly managed during the period of accumulation, as it frees pensioners from the need to live off the unwilling efforts of others: at 65, a person stops selling his labour, and instead becomes a rentier—thereby still receiving what the economists call a factor income.
This second is the pension system mostly adopted by the broad mass of people in Britain. When our betters tell us in their patronising way that this or that British institution is the "envy of the world"—the BBC, perhaps, or the National Health Service—we all know they are lying. But our pension arrangements have so far been just that. No other large European country has anything to match what we have achieved. Nor have the Japanese. What they have instead are pay as you go schemes in which the demographic sums have stopped adding up, that are in consequence visibly running out of money, and that no one believes will pay much at all to those presently funding them. This being said, our own pension scheme is now heading for trouble, and I am beginning to wonder if all those thousands of pounds I have sacrificed over the past two decades will ever come back to me. And this is largely the fault of the Government.
Of course, there are other reasons that might have caused problems even without the present gang of worthless politicians. We are living longer, and we expect to retire earlier. Therefore, actuarial projections based on assumptions of five or ten years of pensionable life are having to be revised to ten or twenty years of pensionable life. Doubtless, there has been some mismanagement of the pension funds. And there is a recession in the financial markets that is squeezing all the pension funds at the moment. But, these allowances being made, the Government has been quietly sucking the life out of our pension arrangements.
One of the reasons why I joined a pension scheme in 1985 was the tax advantages of doing so. Were I to save, say, £100 a month by myself, I should have to pay income tax on the interest or dividends, and capital gains tax were I ever to sell one bloc of shares any buy another. Pension funds, on the other hand, were exempt from tax. Therefore, they could offer rates of compounded growth that it would take very inspired personal management to match. So, for a small monthly payment, I could look forward to a comfortable retirement.
This was not, I grant, a perfect arrangement. It effectively bullied people out of taking full responsibility for their own affairs, and channelled huge amounts of money into corporatist institutions that reinforced the bias in this country against small business. But it worked. However timidly managed, the pension funds generated the returns needed to pay the contracted pensions, and did so without robbing one generation to pay another.
And then the people elected a Labour Government. The new Ministers very largely refrained from obvious tax increases. But they did end the tax exemptions granted to the pension funds. Since 1997, the Government has been taking £5,000 million a year in taxes from the pension funds. This has reduced their present income. More importantly for me, it has wrecked all the previous compounding assumptions. Added to this, the Government has been setting increasingly restrictive rules on how and where the pension funds may invest contributions. The stated reason has been to safeguard our contributions. The real reason has been a combination of desire to regulate everything to provide jobs for New Labour clients, and what I suspect is a plan to rescue the increasingly insolvent pension arrangements of other European Union countries. Not having done the necessary research, I cannot be sure of this, but I believe large amounts of my pension contributions have been reserved for buying Italian and German government bonds.
But the tax changes are enough. People of my generation may now be looking at a far less comfortable retirement than we expected. Some of us may find ourselves in very straitened circumstances. Those of us lucky enough to stay reasonably healthy may find ourselves having to delay or even give up on retirement.
Needless to say, I am consumed with bitterness. I live in a country where it is impossible without complete dedication to raise any kind of fortune. As said, the tax laws have not made it sufficiently attractive for me to play the financial markets in my own right. I still have time to do this—I am lucky in this—but I must now plan a further reduction of my present income; and I must take time away from matters that I have always previously regarded as more important so long as I thought I had contracted them to the care of others. I could buy another property and rent this out, so that one factor income may be supplemented and eventually replaced by another. But my wife works in this market, and she tells me that residential property investment is now so regulated that only large players can expect a good return. So I may have to carry on working until I drop down dead.
More fool me, I suppose, for trusting even mildly favourable institutional arrangements to last. One of the most depressing lessons of history is that large amounts of money are never suffered to remain long in private hands. The rulers of a country always find ways in the end to get their thieving hands on it. That is what happened in fifth century Athens, and in the second and third centuries of the Roman Empire. It happened most notably for us early in the 20th century. By 1914, the British middle and landed classes found themselves sitting on a mountain of gold—the fruits and accumulations of a century of enterprise. This had made London the financial capital of the world and was the real foundation of British world power. In historical terms, it was a crime just waiting to happen. It is a testimony to Victorian liberalism and the enduring strength of the Glorious Revolution settlement that the crime took so long to happen. But happen it did. The politicians got their hands on the money, and spent most of it on corrupting the working classes with welfare and fighting two massive wars from which the country as a whole gained nothing. A lot of the money was saved, but only by raising an army of otherwise useless accountants and tax lawyers, and the conversion of perhaps the most generous and public spirited governing class that ever existed into a pack of useless drones—the modern equivalent of the fifth century senatorial aristocrats who burned their tax returns and sucked up to the barbarians while the Western Empire crumbled around them.
I note with—again embittered—amusement that Winston Churchill has just been voted in a BBC poll the "greatest Briton of all time". He was the longest lived and among the main projectors of the double squandering of our wealth. As such, he was the vilest wretch who drew breath in Westminster during the 20th century. How much better the country would be—and possibly the rest of the world beside—had he drunk just a little too much brandy some time around 1910.
But I digress. My pension fund has been looted, is being looted, and ought to be left alone. So probably is yours. Where are the Conservatives?