Coffee House

We need to reform pensions – here are some ideas

8 January 2014

The government is facing a fiscal crisis. In the face of that crisis David Cameron has promised to continue to raise pensions in real terms. The biggest item of welfare spending – it makes up around half – is therefore set to get bigger. Indeed, over the next 50 years, pensions spending will rise by £330 billion (in today’s prices) partly because of an ageing population, but also because of the coalition’s populism.

It’s likely that the only safety valve left in the system – raising the state pension age – will be used more and more by the government to balance the books. As the IEA’s latest research Income from Work – the Fourth Pillar of Income Provision in Old Age demonstrates, there is plenty of scope to raise the state pension age much faster than the government intends. Indeed, if the government kept the lid on pensions benefits, abolished the winter-fuel allowance and free bus passes and raised state pension age more quickly, it could easily achieve George Osborne’s proposed welfare savings and have money left over for meaningful tax cuts.

Over the last generation we have been living longer, living healthier and retiring much earlier. The employment rate among men aged 55-59 decreased from over 90 per cent to less than 70 per cent between 1968 and the end of the 1990s. Employment amongst those aged 60-64 fell from around 80 per cent to 50 per cent and for those aged 65-69 fell from 30 per cent to about 15 per cent.

We are retiring earlier and yet living longer. In 2006, a man aged 65 could expect to live for over four years longer than he could in 1981.


If things are bad here, they are much worse in continental Europe. Around 60 per cent of Italians between the ages of 55 and 64 are not active in the labour market. Broadly, this means that around half of Italians are expecting to be retired for a long as they work.

Of course, if people wish to work like mad, save like a squirrel hoarding nuts for winter and play golf from the age of 50 at their own expense, then nobody could object. However, our state pension system strongly encourages people to retire at state pension age and the first proposal of this paper is to raise state pension age rapidly and then link it to life expectation. The coalition – following an earlier proposal from the IEA – proposes to do the latter but not the former: state pension age will rise, but only slowly. The pension system should then be privatised along Australian lines. This system requires people to save a given proportion of their income whilst in work and only provides a pension to those with limited resources. People can then take their own decisions about when to retire and face the costs themselves – for a given size of pension fund, earlier retirement would mean a smaller income.

However, it is generally found that simply raising the age at which people receive a state pension leads people to leave the labour market in other ways. Also, there is little point not paying people a pension if they cannot find a job and they end up on means-tested benefits.

We should therefore keep reforming disability benefits so that they provide a route back into work rather than a permanent form of income. But, most importantly, it is important to reform labour market regulation.

The evidence is very clear that employment protection legislation damages the employment prospects of older people who are looking for a job because it raises the risks of taking somebody on. The government should remove employment protection legislation for people within five years of state pension age and bring in a regime of no-fault compensated dismissal instead. This government has a terrible record on labour market regulation. A U-turn in this area would be welcome.

What is needed is a coherent strategy across all areas of policy involving deregulation, cutting government spending and privatisation. At the moment, the government is getting all the flack and none of the benefit from its piecemeal, minimalist approach to shrinking the state. The areas identified by this research would be a good place to start.

Prof Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs

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  • Clive Mather

    There is an interesting article by Fred Pearce in the current (11th Jan) issue of New Scientist:

  • drjohngalan

    I cannot pin down exactly when, but recently I have noticed more and more that frequently pensions were being referred to as “benefits” rather than “pensions”,
    which jarred. Clearly, this is a piece of softening up by the government. It realises it is in a bind and by subtly changing the label applied they can then move on to changing the rules in line with other “benefit cuts”.

    The basic message that the government gives out to the hoi polloi is – do not save for your retirement – we will inflate its value away before you receive the money, or we will change the rules, devaluing your pension. And then they are surprised that saving for their retirement is not top of the list of people’s priorities. Meanwhile, government employees and MPs enjoy their index-linked, final salary schemes that the rest can only dream of.

    The place to start is to encourage people to look after their retirement themselves. Sadly, everybody has worked out that it’s not worth doing.

  • Paul W

    I hate lazy thinking.

    Pensions are NOT welfare. They are a poorly structured annuity – everyone pays in to some extent and we get something back called a pension. Same as our private pensions.

    Get it right.

    • LB

      Ah, but haven’t you worked out the game?

      They say pensions are welfare.

      The on other occasions they say look the benefit bill is too high and we need a cap on welfare payments to scroungers etc.

      Mr Balls, speaking at the Labour Party conference in Brighton today, said a Labour government will have to ‘govern with less money around’.

      The shadow chancellor said: ‘The next government will have to make cuts too, because while jobs and growth are vital to getting the deficit down – something this government has never understood – they cannot magic the whole deficit away at a strike.’

      Mr Balls said: ‘We will have a cap on structural social security spending.’

  • Tom Tom

    So why are Public Sector Employees at places like HMRC continuing on Rule of 34 allowing retirement at 52+ on full pension indexed ? Why is it the Private sector and lower level public sector employees who get hit but not the Upper Echelons of the Public Sector ?

  • HookesLaw

    Old age pensions spending in 2012 was £94 billion. You can add another 600 billion on to that to get total govt expenditure. Total NI contributions as far as I can see are 105 billion.

  • Clive Mather

    Most sensible countries have one or more sovereign wealth funds, some of which at least are used to finance pension provision. While Boudicca, a.k.a Margaret Thatcher, was using North Sea oil revenue to fund the dole resulting from the mass destruction of industry and to pay for tax cuts for the rich, the Norwegians used their oil revenue to set up a pension fund. I’m not sure of the current figure but a few years ago the value of the assets worked out at about £88,000 per person.
    As it is, the fruits of Boudicca’s largesse are large tracts of blighted land, broken communities dependent on benefits and overpriced housing. The receipts from privatisation have been swallowed up without anything much to show for it (not for ordinary people anyway). The irony is, that a large chunk of privatised industry has now effectively been nationalised again – but not by the British government! For example, the biggest rail freight company is owned by Germany (via the state owned Deutsches Bundesbahn), and most ports are owned by Dubai.
    We need to get in on the act. If shale gas turns out to be anything like as promising as some forecast this will not only supply a large amount of our energy but also bring in juicy tax receipts (hopefully even the mouthy, innumerate, third-rate products of Oxford University who make it in politics will be competent enough to realise this). This money should be used to give every newborn child a substantial pension starting pot. £20,000 (for example) invested in shares would give a tidy pension pot by the time the child retires. The pension resulting from this could be used to substitute for the traditional state pension funded from current taxation (perhaps retaining this in the form of a guarantee of a minimum income as a safety net). This process – of giving a starter pension pot at birth – could continue even when the shale gas money runs out. The cost with today’s (abnormally high) birthrates works out at about £15 billion per year with a £20k investment per child.
    Not peanuts of course but compare to other state expenditure – and this money would definitely benefit future generations.

    • Andy

      Pay off the National Debt first and run a balanced budget.

      • LB


        Total debts, 9 trillion, pensions included

        Annual increase in the debts, 850 bn a year.

        Spending 722 bn

        Taxes – all of them – 600 bn

        So what’s the plan to pay off the debts?

        • Andy

          You tell me.

          • LB

            I thought you were going to tell me. I just quantified the problem.

            Pay off the debt? Never going to happen. Run a balanced budget? Possible.

            So that leaves what’s going to happen and is happening.

            They are going to default on the pensions.

    • Daniel Maris

      The Norwegian SWF will be worth about $200,000 for each and every Norwegian citizen in 2020, which I guess could easily earn $8000 for each of them – or $32,000 per annum for a family of four!

      I don’t think the Norwegians really know what it’s all for!

      Of course a similar SWF for us would probably only amount to about a tenth in value per person.

      • HookesLaw

        The Norweigian govt is limited I believe to spending 4% of the fund on their expenditure – it rarely seems to reach this figure and the current budget I believe uses 2.9%.
        It is not specifically allocated to pensions – though presumably the income from it makes state pension payments easier.
        However the pension age in Norway is 67. There are currently protests in Norway over the cuts in pensions that reforms introduced about 10 years ago will bring about. The financing of pensions is the same as here – payments in cover expenditure out.
        When they talk about spending the wealth fund in Norway they talk about all sorts of pet schemes.

        Norway is a nice place until you want to go out for a drink and then you have to take out a bank loan.

    • HookesLaw

      Higher rate tax revenues went up when the stupidly high penal rates of tax went down. And top rate taxes were still higher under many Thatcher years than they were for all of the Blair Brown years.

    • HookesLaw

      By far the largest of Norway’s 2 sovereign wealth funds was introduced in 1990 – just as Mrs Thatcher was leaving office.

  • Daniel Maris

    Let’s get this in context.

    GDP has grown about 45% since 1990. Our population has not grown that much and neither has the number of old people.

    This graph shows the growth in the 65 plus age range has not been as rapid as some suggest –

    The labour force is growing and there been a natural increase in the number of people aged 65 and over working as older people are now, generally, healthier people.

    Someone is trying to rip us off – and it’s basically the super-rich both in this country and abroad (by siphoning off tax revenue).

    If we taxed properly and made proper pension provision, we could easily provide for people in old age.

    It’s not rocket science.

    • HookesLaw

      We do provide for people in old age.
      The state pension is a basic pension. People should make provision for themselves in old age on top of that. The writer of this article makes no attempt to suggest how this can be encouraged.

      • Iain Hill

        You miss the point. It is the protection of that basic contracted pension that is at risk. No question of improving it.

      • LB


        However, you miss a basic question. Why shouldn’t people be allowed to opt out completely, keep 90% of their NI (10% goes on insurance) and invest it.

        For a median wage earner they would have gone from a 146K state pension to a 750K fund to buy income.

        That’s a massive difference and it shows the extent of how the welfare state has made poor people very poor.

    • Tom Tom

      Daniel……you will find The State is the greedy one sucking up money. Pensions are 20% State Spending but the NHS budget is focused on the elderly too. Ageing demographics and the boost to early retirement/redundancy in the 1980s has produced a much unhealthier population costing more as fewer hospital beds are available.

      Just look at pensioners with fractures and such because they have been car owners rather than walkers…….

      • HookesLaw

        We are living longer but are living less healthy lives you say??

        • Hugh

          Yes, there’s no contradiction at all.

          • HookesLaw

            Smoking is down for instance. Why has ageing produced an unhealthier population? Very old people need care, but our own Queen has shown that old people need not be unhealthy.

            • Hugh

              They need not be, but they are far more prone to be so.

    • LB

      Someone is trying to rip us off – and it’s basically the super-rich both in this country and abroad (by siphoning off tax revenue).


      Nope. You have to look at the debts.

      The state owes 9 trillion.

      Now there are no super rich involved. It’s pensions, and the pensions the state runs. Civil servants and state pensions primarily.

      Not a bank involved.

      Not the super rich.

      If you work out what a median wage earner would have got if their NI had been invested, its 830,000 pounds. That’s from their contributions alone. The state pension cost 146,000, and that was before the last default by raising the age of retirement.

      People have made proper provision. However, the state has spent their contributions and now cannot pay.

      So you’re right, its not rocket science.

      As for there being super rich who if only you can get your hands on their money, it would all be hunkey dorey, that’s just a fairy tale. There is no pot of gold at the end of the rainbow in Switzerland, and if we could only catch the leprechaun, it would be ok, That’s more believeable.

      The reason is this. Those pension debts are going up at 734 bn a year, and you have the borrowing on top. About 850 bn you need to find on top of 600 bn taxes. Even if you doubled taxes, you still haven’t solved it.

      So right reason, its been siphoned off. Super rich? Nah, its MPs splashing the cash.

      Solutions? Just one. Default on the promises.

      So you have to make decisions.

      Pensions or welfare? Who wins?

      Pensions or the NHS? Who wins?

  • Jackthesmilingblack

    Pay the increases on NI pensions to retired Brits residing abroad, HMG. Outrageous discrimination. Pay up you white-collar criminals

    • LB

      Correct. Its been paid, and they’ve defaulted.

      Just as they will do with people living in the UK.

      CPI not RPI – 15% off your pension.

      1 year extra before you retire? 5K loss of income, 5K extra paying in. Yet another fraud.

      Now for the biggy. What have people lost? For that we need to know what they would have got for their money if it had been invested.

      For a median wage earner that is 835K. Less 10% for the insurance element, that’s 750K. State pension costs 146K. So they have been ripped off for 600,000 pounds.

      Yep, someone on 26K a year has lost 600,000 pounds because people like Philip Booth think the state is out to help people

      • dalai guevara

        We are paying for bankster gambling debt.
        We cannot afford pensions because we are paying for bankster gambling debt.
        Bankster gambling debt is the reason why we cannot afford pensions.

        The reasons why bankster gambling debt is stopping us from affording pensions are inconceivable.

        • HookesLaw

          We can afford pensions pensions are being paid. The bank bailouts will be paid back when the banks shares are sold off. You are talking gibberish.

          • dalai guevara

            The delay of that sale by 6+ years will take 35% off the value alone never mind the things we could not afford to kickstart in those 6 years+ due to lack of funding.

            Frankly, your argument is outright fatuous.

            • HookesLaw

              The bail outs do not count in the published deficit figures.. they are not affecting govt spending.
              It remains to be seen how much we get back when we finally sell our shares. There seem to be moves afoot to sell off our share in Lloyds sooner rather than later (6% was sold late last year). Its expected to get £19 billion.

              But the bail out of the banks has got nothing to do with pensions.

              • dalai guevara

                Your last sentence is correct, and then it’s not.
                I will repeat mine again, just for you:

                the reasons why bankster gambling debt is stopping us from affording pensions are inconceivable.

                • Tom Tom

                  following the US down the rabbit hole

                • HookesLaw

                  You are bonkers

              • Tom Tom

                £19 billion for a bank capitalised at £43 billion which was the 6th safest bank in the world in 2007……pathetic. Shareholders have lost 94% capital invested………it is value-destruction on a scale unknown outside defeat in war

                • HookesLaw

                  The govt ‘only’ own a minority stake in Lloyds – they got 6 billion a while back so they would not expect to get 43 billion.

                  Shereholders and all of us can blame Brown and the then chairman for destroying Lloyds shareholder value.

                • dalai guevara

                  ‘Shareholders’ are this great mysterious group of people. Hardly anyone knows any shareholders personally until they come to draw their own pensions.
                  This fundamental disconnect of the people and their assets in Britain strikes me as an amazing phenomenon. People are not only purposely misinformed, many genuinely do not want to know (!)

          • Tom Tom

            SO Lloyds is going to pay me £5.50/share from the proceeds of a Government flotation ?

            • HookesLaw

              Your point is?

          • LB

            First part – no

            Second part yes.

            Third section – some of the time you do! :-) See part 1

        • Nicholas chuzzlewit

          Utter rubbish as always. The cost of bank bailouts are inconsequential compared to the contingent liability which is our commitment to state pensions. A vast amount of the bailout money has been recovered by way of premiums paid by banks for government asset protection schemes. The reason we are having this debate is because the last government ran up a vast structural deficit the size of which has nothing to do with bank bailouts and everything to do with government profligacy. Stop peddling your gibberish and utter rubbish on these threads.

          • dalai guevara

            A bankster bailout does not affect pension returns? Who are you trying to kid here when bank shareholdings ARE the pensions?
            Perhaps team up with tvg and set up some new concern dishing out conflations. You’d be very good at it.

            • LB

              A bankster bailout does not affect pension returns?



              However lets look at the state.

              7.1 trillion liabilities for the pensions. That isn’t affected at all by any asset return.

              However we now need to see how much that debt is offset by the assets held, and the return on those assets.

              Lets say that the banker bailout has reduce assets returns from 200% to 100%, because Brown was such a brilliant investor.

              Hmmm, what assets? Zero. There are none. So it doesn’t matter what the return on assets are, the debt for the state doesn’t change.

              You could assume it was all invested in bitcoins or Apple stock, given that there are no assets, its irrelevant.

              • dalai guevara

                Apologies for sounding daft, but what pensions are we talking about here? Pension pots that don’t exist (those of the state) or private pension pots?
                Private pension pots could of course be heavily affected by bankster bailouts!

                • LB

                  We’ve been talking about state pensions and civil service pensions.

                  So there’s no bank involvement.

                  There are no assets so asset returns are irelevant.

                  On the banking mess, its all retail Look at the list of failures. Retail banks in the UK

                  The reason, people didn’t pay their debts

                • dalai guevara

                  Again, correct but selective.
                  It was Lehman (what retail?) that kickstarted the tumbling house of cards. Retail failed yet investment would have survived? That would be a crystal clear smokescreen. There were no major repossessions in the UK, hard assets did not collapse, so how could retail possibly be the cause?

      • Tom Tom

        Welcome to War Loan – world of default

  • LB

    Notice too what Mr Booth is doing, doesn’t mention how much the state owes for pensions.

    Page 3 and 4, and out of date. Between 2005 and 2010, the debts increased at 734 bn a year.

    Taxes even now only come to 600.

    In otherwords, its tipped. It’s beyond solving without massive defaults.

    So if you’re poor in Glasgow, with life expectancy of 70, before too long, it will be odds on that you get no pension for your money.

    Then as it turns out only the rich get paid, the majority will decide that’s not fair.

    As usual the poor gets screwed.

    • HookesLaw

      The money going in is paying the pensions going out. Its not being splashed anywhere.

      • Tom Tom

        Pay As You Go

        • HookesLaw

          Yes – like Norways pension system. Indeed its the same in France where ‘saving’ for pensions is compulsory. But the system is one where the contributions being paid in go straight out to pay the pensions of those entitled.
          Pension age is rising in France or rather the number of years you have to be in the scheme to get a full pension is going up. From 37 years to 42 years. Thats assuming the trade unions and theior strickes allow it.

          I think most state pension schemes around the world are pay as you go. LB needs to get a grip.

          • LB

            The healthy ones aren’t.

            Argentinas was great before the state confiscated them because it couldn’t pay its debts.

            Australia as a scheme where you pay in for assets.

            Singapore too.

            Ie. The countries that don’t have a pension crisis are the ones where people have to save in to assets.

            The ones, such as France which will tip quite soon, are the ones that ran Ponzi pensions

        • LB

          You pay, and the money goes to someone else.

      • Iain Hill

        Show us the facts, if you believe that. The fund was raided for years!

        • HookesLaw

          There was and is no ‘fund’.

        • LB


          Don’t worry about HookesLaw.

          He’s adamant the state owes no one a penny for pensions. It’s not a debt.

          ie. His solution is not to pay out anything.

    • Tom Tom

      When Lloyd George introduced pensions copying Bismarck the life expectancy of a male was 2 years retirement. The system was predicated on men dying shortly after retirement and making the middle class pay the bills from their longer life expectancy. The financial repression in the 1950s forcing trustees to invest in Consols @3% destroyed private pensions until Ross Goobey moved into Equities

      • LB

        So what is your solution. A return to the good old days where the poor pay in, but die before they can receive, and the rich who live longer take the cash.

  • LB

    Over the last generation we have been living longer, living healthier and retiring much earlier.


    Yep, Entirely predictable. The state still took the money.

    Lets be absolutely clear. The only reason for this mess is that the state took the cash, and splashed it instead of investing it.

    End result, no assets, but massive liabilities.

    Time to start with some prosecutions for the fraud.

  • LB

    Pensions are not welfare.

    Pensions were paid for.

    Pensions are a contract. If the state takes the money, the state owes the pension.

    The fact that its left so much money off the books, shows just what’s going on, fraud.

    See sections 2-5, 2006 fraud act.

    1. Off the books? Tick – misleading
    2. Risk of loss or actual loss – Tick for both.

    The state are fraudsters.

    • Tom Tom

      Ontario teachers pension Fund owns The National Lottery, HS1, Birmingham and Copenhagen Airports and has C$130 billion in Assets. What does the UK Teachers Pension Fund own ?

      • HookesLaw

        And how much would teachers have to pay into it if there was one?

    • Iain Hill

      Hear, hear! Why has there been no investigation of how successive governments have raided the fund?

      Also, are we so stupid that we cannot realise that constant raising of the pension age will worsen the plight of young people unable to get jobs?

    • Trowa Barton

      Wrong. Pensions weren’t paid for. As I’ve mentioned before (and anyone who is willing to do 10 seconds of cursory research could find out), there is no pension fund. The state never even claimed there was. The money paid into N.I. goes into the general taxation fund. Anyone who paid into this non-existent ‘system’ and is now surprised that pensions are ‘under threat’ shouldn’t have voted the way they did for 40 years! So much talk about ‘doing the right thing’ and ‘responsibility,’ but its this generations pensioners who never saved for their retirement and failed to do even basic research into where their N.I. payments went who are the most irresponsible of all.

      We could solve these problems by establishing ACTUAL pension funds, and have N.I. INVESTED in something REAL. Not just spent on the governments latest welfare/health/war project.

      You get the system and leaders you deserve – fact. This is what happens when the economically illiterate vote for whoever will promise them the most loot.

      • Tom M

        I totally disagree with that statement. Whether the system is a current account or a deposit account is not my concern. I don’t ask the bank manager what he does with my money when I deposit it in his bank. I only know I have made a deal to get my money back at some date and in the meantime earn interest (currently a joke) for me.
        If very clever civil servants and our democratically elected representatives come to the conclusion this was the best way to run the system then who am I to gainsay that?
        That the system is now seen to be badly constructed is true but how many saw that 25 or 50 years ago? Economically illiterate we might be but that’s why we employ these people to look after our interests.

        the majority always votes for the candidates promising them the most benefits from the public treasury Quote: Alexander Fraser Tytler

      • monsieur_charlie

        You’re second sentence “Pensions weren’t paid” for interests me and begs the question who did pay for them then?

  • Roy

    “The biggest item of welfare spending …”, and the biggest vote puller no doubt.

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