Pensioners of tomorrow need to struggle today

Christine Shawcroft, candidate for Labour's NEC, reveals the holes in the Government's strategy for providing security in retirement.

"I warn you not to be old," one erstwhile Labour Leader said in 1983. Fifteen years later, it's looking a far more desperate prospect. While the pensioner of today has to survive on a meagre state income some 50% lower than European counterparts, the pensioner of tomorrow will have to take his or her chances with the stakeholder or citizenship pension.

A Green Paper on pensions is due out later this year. Meanwhile, current Government thinking is revealed in the recently published Welfare Reform Green Paper. This document pledges the Government to retain the basic state retirement pension, but makes clear that it will only be increased in line with prices, thereby condemning those dependent on it to further marginalisation and deeper poverty. In 50 years time today's pension will only be worth a third of its current value.

The ageing population is presented as the problem and private funded pensions are presented as the solution. Yet these are two separate issues which should not be conflated. First, the issue of an ageing population is real but exaggerated. The OECD projects the proportion of retirement age population to remaining population over 20 as rising in Britain from 34% in 1995 to 46% by 2045. (By comparison this proportion is projected to rise to 76% in Italy and 68% in France).

The increase in Britain is affordable under the present pay-as-you-go scheme. Based on Government Actuary's figures over the next 50 years the net effect of increasing the basic pension in line with earnings would be only 0.4% of GDP, and for the restoration of SERPS only 0.8% of GDP. After all, people's contributions are still linked to earnings; why not their benefits?

More importantly, private funded schemes do not create greater national income. There is no magic money. The income stream of privately funded pensions, whether occupational or personal pension schemes, still has to be paid for from the wealth created by current workers.

Proponents present it is axiomatic that "fully funded" schemes give a better return than "unfunded" schemes. (Even the language is used to imply that they are giving you a guaranteed income where none previously existed.) Yet there is no evidence that "funding" raises GDP; it merely represents a transfer of one form of saving to another. Under the "funded" schemes contributions are invested on the Stock Exchange and the returns through capital gains or dividend payments become your future pension (and remember your investment can go down as well as up). If the real problem is an ageing population, the pensions firms will in future need to become net sellers of securities. The costs will still need to be met.

Under the National Insurance/SERPS pay-as-you-go scheme, the payments of today's pensioners are met from the contributions of today's workers. It is a simple and financially efficient scheme whose administration costs are but a fraction of private schemes -- even before taking account of their profit margins. The cost of running state pensions is about 1% of pensions paid compared with up to 20% for private pensions. Not only is the state scheme simple and secure, but it represents a binding expression of inter-generational solidarity.

Of course, the proposed change is more than mere cost-cutting. It breaches the principal of universality. It creates a two-tier welfare system -- stakeholder pensions for better-off workers and citizenship pensions for the poorest. Universality is vital to reach people in need. To those who raise the spurious concern of millionaires getting state pensions the answer is simple: tax the millionaires. It is more efficient and brings in greater revenue.

But, it is said, the stakeholder pension helps to make us all capitalists. It gives us all a stake in the system. Everyone cheers when the stock market rises and fears when it crashes, because their own pensions are at stake. We all then have a stake in perpetuating rather than transforming the system. Workers have more to lose than their chains -- they can lose their pensions as well. Tony Blair and Gordon Brown boast of the virtues of Britain's flexible labour market, by which they mean short-term, insecure, low wage employment interspersed with periods of unemployment. Yet these are the very labour market circumstances which make it impossible to save for a private pension and highlight the benefits of SERPS. Far from modernising the welfare state, the Green Paper looks backward to a form of poor relief.

The one thing most people seek from a pension is security, yet the proposed stakeholder pensions represent a huge gamble. A decent universal pension state funded pension scheme is a concrete expression of core Labour values. It is about the redistribution of income to ensure we all share in the country's rising prosperity. Our answer to the Green Papers should be to fight for re-linking pensions to earnings and fully restoring SERPS -- because there is no just and practical alternative. The pensioners movement has fought a great campaign in highlighting these issues -- but it is the rest of us who need to worry most.

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