'Retire early with independence'

The SNP have suggested that plans to raise the pension age would be put off in an independent Scotland.  The Scots die earlier – two and half years, on average – and the calculations don’t look the same for as they do for England.

That has to be right in principle, but it poses a practical problem.  Currently the State Pension is geared to a person’s work history, and the records are held in England.  To administer the pensions in line with existing entitlements, the Scottish Government would need to have access to those records.  There’s no obvious practical way of doing this, short of an individual request for details of each and every person by National Insurance number.    The pension would not be paid by the English authority, so the record would then have to be transmitted back to Scotland for processing and payment.

If there was instead a Citizens Pension, based on age, the records wouldn’t matter, and the provision of pensions could start from scratch.  That is only going to be politically feasible if the scheme is more generous than existing entitlements.  The UK government’s recent reform of pensions has gone some way towards establishing the new criteria, and it would only take a few small tweaks for it to be possible.

Benefits in an independent Scotland

A recent report by the Institute for Fiscal Studies has received a lot of press attention, and it has some helpful facts and figures, but it actually does very little towards breaking new ground. It says that benefits in Scotland cost relatively more than England for some groups (notably, for people with disabilities), and relatively less for others. It says that most of the money goes on pensions, which is hardly news. And it says that if there is radical reform, there will be losers as well as gainers, and that it is only possible to mitigate the losses by spending more. So far, so obvious.

The remit of the IFS briefing note is limited; it’s concerned with expenditure rather than equity or methods of paying benefit. It doesn’t actually provide key data on the issue which most people want to know, which is what Scotland could afford. To work that out, it would be necessary to compare Scotland’s national income and government revenue on one hand with liabilities and expenditure on the other – we have a good idea of how much money is spent, but how much revenue there would be is another issue entirely. Without that, it’s not really possible to say anything about the affordability of benefits. There are no indications that Scotland’s liabilities exceed its income to such an extent that benefit payments would be impossible; but beyond that, it’s difficult to draw any firm conclusion. What a country can afford depends on what it’s willing to pay for.

There are more serious challenges to developing a devolved or independent benefit system, but they are as much about mechanism as about cost. One example which emerged earlier this week was the question of what happens to occupational pension schemes: a cross national scheme has to be funded, so any Scottish schemes would need to be separated out. That points to a general issue about such schemes, which is that the smaller the scheme is, the more difficult it can be to balance the contributory base with existing liabilities. The basic way to overcome that problem is through pooling of risks between pension schemes – which generally happens in France (it’s referred to as a form of ‘solidarity’), but not in the UK, and its absence is a major reason for the instability of current UK schemes. A larger problem is the question of what happens to the contributory National Insurance system when all the records are currently held in Newcastle. I’m doubtful that the system is susceptible to devolution. It’s hard to see on what basis records could be transferred; Scotland would need a new and different pensions scheme, like a Citizens Pension.

There are, too, problems of cost control generated by a range of benefits which pay people to buy specific services in the market – housing, social care and child care among them. This approach is inherently defective; in every case it has led to accelerating costs without providing adequate basic protection. Any government, whether it is for Scotland or the UK, would need to rethink.

The Expert Working Group reports

The Expert Working Group on Welfare, set up by the Scottish Government to review the implications of independence on welfare administration, has reported. The Group recommends a transitional period of joint administration. In a nutshell, more of the UK system is administered in Scotland than benefits for Scotland are administered in England; it follows that the UK government cannot practically withhold cooperation. While that’s true, the most significant obstacle to independent administration would be that the contribution records are held in England; without the records, the current pensions scheme could not be maintained.

However, I’m not convinced in any case that a commitment to maintain benefits as they are is a good idea, for reasons I’ve outlined in this blog – that arrangement would pickle the current system and make it difficult to reform anything. As there is shortly going to be a flat-rate pension in any case, it should not be difficult in practice to move away from contribution-based entitlements – provided the money is available to buy out existing entitlements.

‘What Pensions Arrangements Would Scotland Need?’

A paper from the Institute of Chartered Accounts – the question is taken from their subtitle – offers a complex series of questions about pension arrangements.  I’ve raised some of the issues previously in my own submission to the Expert Working Group considering welfare in Scotland.  Pensions are much more difficult to manage than means-tested or universal benefits, which can be delivered and adjusted according to circumstances.  Most pensions are based in established entitlements, based on previous contributions.  That leads to three problems.  The first is how to deal with the rights established for state pensions.  The records are centralised, and entitlements are held by expatriates as well as people in the UK.  It would be difficult to respect those arrangements.  The obvious way round the problem is one that the coalition government has already moved towards, which is to replace the contributory pension with a more universal flat-rate benefit.

The second issue concerns occupational pensions.  It’s clearer in this case where the liabilities lie, because the rights are held in relation to specific funds; in principle, cross-border pensions should work on the same basis.   There is a problem, however, in the way that such funds have  been set up in the UK, often avoiding essential EU regulation.    If a firm declines, or if an industry shrinks, the number of contributors falls, and the resources to pay the pensions are reduced.  The essential way to deal with this is for funds to pool their risks, a process usually referred to  as ‘solidarity’.    The absence of those protections means that many schemes are insecure or non-viable.  The issue has been left to fester for too long.

The third issue concerns transitional arrangements.  The entitlements that people earn last for decades; for example, there are people working now who paid for a Graduated Pension in the 1960s and 70s, and elements relating to the Graduated Pension, which are worth very little, may still be around forty or fifty years’ time.  There is a quick and simple answer, which is to buy out entitlements.  That, of course, would cost money.  However, the alternative – which is to keep existing arrangements for another eighty or ninety years – will cost more over time.

The ‘pensions timebomb’: don’t panic!

There are reports today that an independent Scotland would face a ‘timebomb’ from increasing numbers of older people.  Scotland on Sunday mangled the figures when it reported that “an independent Scotland would have to increase the proportion of GDP spent on welfare from the current level of 14.4 per cent to around half.”  That would be three-and-half times current spending.  This is obviously wrong, but I’m not going to criticise – one of the hard lessons I’ve learned from writing this blog is that it’s all too easy to jumble figures from different calculations  before hitting the ‘send’ button.  (And yes, I confess, I just did that again on the first version of this very post.)

The actual increase that’s being reported is that the ratio of pensioners to workers will double, going from 25.8 pensioners per 100 workers to 51.7 by the year 2060.   (The figure for the rest of the UK is 45.9).   If that is translated into public expenditure at current rates – which probably won’t happen – it implies that two workers will need to pay for pensions what four workers pay now.  As pensions currently cost half  the ‘welfare’ budget, that implies a 50% increase in that budget, not a 250% increase.  There’ll be increased calls on health and social care, too.  These are contingencies that need to be planned for, but none of them is catastrophic.

I’ve previously considered the general principles of managing the costs of an ageing population in this blog.

Have pensions just been capped?

I’ve been trying to follow the Budget. One of the most important statements for welfare policy could be this:

“the Government will strengthen the public spending framework by introducing a firm limit on a significant proportion of Annually Managed Expenditure (AME), including areas of welfare expenditure. This will be designed in a way that allows the automatic stabilisers to operate to support the economy.” (page 3 and paras 1.61-62)

If there is a firm limit on AME and welfare expenditure, that must mean that benefits are capped. Two thirds of relevant expenditure on ‘welfare’ goes to pensioners and nearly all the projected increase in the costs of welfare is attributable to the numbers and entitlements of people over retirement age.  Here’s a table taken from the Benefit Expenditure Tables:

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Forecast Forecast Forecast Forecast Forecast Forecast
Nominal terms £bn
Children 1.7 1.6 1.6 1.6 1.6 1.7
Working Age 54.7 50.6 50.6 51.1 51.8 52.2
Pensioners 109.7 111.0 114.5 118.1 121.4 124.8
Real terms, £bn, 2012/13 prices
Children 1.8 1.7 1.6 1.5 1.5 1.5
Working age 54 54.7 49.6 48.6 47.8 47.3
Pensioners 109.7 108.8 110.1 111.3 112.1 113.1

If AME expenditure is capped, it seems to imply that payments to pensioners have to be capped. Is that what the government intends?

How an independent Scotland could manage the cost of pensions

The Herald reveals that the Scottish National Party is apprehensive about the potential size of the benefits bill. As benefits are the largest element in UK spending, there should be no surprise. Equally, it should be obvious that the largest element in the benefits bill – two thirds of spending – goes on pensions, and while Scotland has slightly lower expenditure on pensions than England, this is the part of the benefits bill that is most likely to increase over time.

It would be difficult however to manage pensions in an independent Scotland, for two reasons. The first is that state pensions are contributory, and the existing system could only be maintained through a massive transfer of detailed work records. The second is that transitional people’s rights will be complex, and it is liable to last for fifty years or more. Fortunately, there are straightforward answers to both problems. The quick way to deal with the first problem is to move to a Citizens Pension. The government could de-couple basic pensions from prior commitments, dividing any legacy fund available for S2P among those entitled, and otherwise ignoring for the purposes of benefit administration additional income or additional pensions. The way out of the second problem is to buy out people’s rights.

Paying for expats

The Sun berates “Britain’s Bonkers Benefits” for paying £92 million to expatriates. I was surprised by that figure, because of course Britain pays far more to expatriates than that: the largest benefit by far is the pension, and the Sun has dropped it from their tally. “Most won’t begrudge a state pension to anyone who has paid their dues before retiring abroad.” Just so: and since Attendance Allowance and Winter Fuel Payment are mainly there for pensioners, and Bereavement Benefits are clearly paid for from contributions or ‘dues’, presumably most people won’t begrudge those either. According to the DWP Tabulation Tool, there were 1,207,660 benefit claimants abroad at the last available date (May 2012), and 1,186,250 were for State Pension alone. The Sun also complains that the expats ‘no longer pay into the tax pot.” That’s the problem with these pesky pensioners. Unfortunately, if they were in Britain, they wouldn’t do a lot for the Treasury coffers, either.

This comes at a time when benefits paid in Britain for foreign citizens. We could agree a system with our partner countries where countries support the people who live there, in which case the bill for foreign residents would increase; or we can agree a system where everyone is supported by their home nation, in which case the bill for expats is going to increase. At present Britain seems to do rather well out of the arrangements.

Pension plans

The White Paper on Pensions has now been published, outlining plans for a flat-rate National Insurance pension. The first announcements stressed that it would be widely available, but the detail means that people will need to have made contributions for 35 years’ contributions to get the full pension, and the transition will be painfully slow: the government expects that 80% will be on the new pension by 2030. It will improve the position of women and self-employed people, mainly at the expense of higher earners who will lose earnings-related benefits.

It won’t be a universal Citizen’s Pension – there will still be some people who don’t qualify, and so there will have to be a Pension Credit to provide a minimum income for the people who are left out. This should cover many of the people who currently receive Pension Credit, who are entitled to Pension Credit but don’t receive it, or who are debarred from receiving it because they hold inherited capital. However, people who have paid less than 35 years will have pensions reduced proportionately and the long transition will mean that Pension Credit will be around for many years to come.

It won’t be a return to the Beveridge scheme, either. The Beveridge scheme was supposed to provide an adequate, flat rate pension, and the current scheme reasserts that principle. Beveridge, however, but it was based on a flat-rate contribution – without that arrangement, Beveridge believed, it would not really be an insurance scheme. Nor will this be; paying earnings-related contributions for flat-rate benefits is taxation under another name. The reason Britain moved to provide earnings-related pensions (SERPS, and then the State Second Pension) was the realisation that continental schemes were protecting pensioners rather better than the Beveridge scheme did.

There will still be holes, however. One big question concerns housing costs, and how they will be met – as things stand, HB and CTB calculations together can remove most of the money received just above current pension levels. Another is what happens to pensioners now; some of the people retiring this week will still be around in thirty years’ time. The money to pay for pensions is not saved – it comes from the current working population. Existing commitments to earnings-related pensions will have to be maintained for some time, but the quick, and fair, solution, would be to extend the universal, non-contributory pension for the over-80s so that the entitlements of the current generation are respected while they move over time to a more generous and more secure set of arrangements.

A man for all seasons

This morning Radio Wales asked me to be up before six to be interviewed about the proposals in a report, Delivering Dilnot, edited by Paul Burstow MP. (My wife’s reaction to being woken at 5.45 this morning: “For Wales?”) Part of the proposal is to implement the Dilnot recommendations in England, limiting the amount that any person will have to pay for social care and increasing exemptions for capital on the means tests. (Scotland has ‘free personal care’, but the system is far from perfect. It has been shackled to a complex, selective process where needs are closely specified and nothing is delivered without prior assessment. In common with many other selective systems, that leads to confusion, complexity and inexorable increases in the budget.)

The report argues that the Dilnot proposals can largely be paid for by removing Winter Fuel Payment except for claimants of Pension Credit. The Conservatives have pledged to maintain WFP, but it has long been identified as a prime candidate for cuts. Pension Credit has many of the usual problems of means-tested benefits – complexity, low takeup (a third of those eligible don’t get it) and errors in calculation. The main justification for doing this seems to be that people don’t like better-off pensioners getting WFP. This seems to me a very weak argument – the same case could be used to reduce the state pension. If we’re not happy that a few older people have very large personal incomes, we can tax them on those incomes without complicating the pensions system for the rest of the population.

If the policy in Burstow’s report was to be implemented, it would imply a transfer of resources from most pensioners to the children of better off pensioners, who would inherit more. There’s no good reason, however, to suppose that this redistribution is what would happen – if government wants to implement Dilnot, it can afford it, and if it is trying to raise money, it is likely to cut WFP regardless. The two policies seem to me quite separate.