Outlook and policy challenges for 2012
by Dr. Ros Altmann
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Will 2012 be a better year than 2011? I certainly hope so! High inflation and rock bottom interest rates have been a disaster for pensioners, savers and pension funds this year. Pensioner inflation has been even higher than for the rest of the economy and savers have suffered as their income has lagged behind the rising cost of living. Pension deficits have ballooned, damaging many UK companies and plunging annuity rates have meant lower lifetime pensions for those reaching retirement.
The Bank of England’s Quantitative Easing (QE) policy is partly responsible for these problems. I hope QE will be abandoned in 2012, as the Bank finally recognizes that buying gilts is a short-term fix which lowers long-term interest rates, but does not actually create growth. QE has potentially damaging long-term consequences. Yes, it helps borrowers and banks, but it hurts savers and creates inflation (that’s what it is designed to do), which damages consumer confidence. The £275billion of newly created money has boosted overseas economies much more than the UK, which in turn has increased inflation. If the Bank wants to stimulate the economy, it must get money directly to those who need it, such as small businesses who are being starved of credit. And the Government should consider extending ISA allowances so that less of savers’ meager interest income is taxed.
Government help for pension funds to invest in infrastructure projects, could create jobs and longer-term prosperity. Local authority and large company schemes have billions of pounds for paying pensions for the next 50 years or more, so some of that money could be used now to invest in our future. But the investments may require some Government help to provide a risk cushion for investors. Underpinning inflation-linked returns for infrastructure investment would be a sensible way to stimulate growth, without the normal near-term costs of such projects.
2012 should be a momentous year for pensions. As auto-enrolment starts, with all workers automatically enrolled into an employer pension scheme, they will have to choose to opt out, rather than choosing to join. This should bring many people into pension saving for the first time.
State pension reform is on the cards too. A White Paper is expected, proposing a flat-rate simpler system, joining together the existing Basic and Second State pensions, giving a new state pension around £140 a week, which is above means-tested Pension Credit. Such reform is essential auto-enrolment to safely proceed, since many lower-paid workers would end up saving in a pension scheme that merely replaced Pension Credit benefits they would otherwise have received anyway, meaning their contributions were wasted.
But retirement income is not only about pensions. Numerous recent reports and scandals have highlighted the inadequacies of our social care system, which leaves all pensioners with assets worth over around £23,250 (including their house), at risk of losing everything they have saved for their whole life if they have pay for care in old age. Care is funded by local authorities, and council cutbacks have left many people requiring care but having to find money themselves, or just not getting the care they need. The collapse of Southern Cross a few months ago, reports of abuse and neglect of older people in hospitals or other care settings and mis-selling of financial products to vulnerable older people by large banks have all highlighted that our care system is in crisis. We urgently need to sort this out.
The Government will introduce a White Paper on care reform in the Spring, but I fear it will not go far enough to improve the lives of Britain’s older generations. We need more integration between health and care services, and better funding. The Government has failed to ensure decent care standards and continued underfunding will lead to more frail, elderly people draining resources from the NHS, rather than being better cared for in their own home or in a properly funded care home. So far, the Government has paid lip service to reforming social care. Even the £2billion it said it would be giving councils to help increase care funding has not been ringfenced, so the extra money is not actually being spent on care.
Recommendations from several official reviews of care this year could help overcome the problems of our system. Esepcially after the recent scandals, it is essential that Ministers take this opportunity to reform the way social care works in this country. Andrew Dilnot’s recommendations have cross-party and industry support and could form the basis of a sensible new framework, helping people understand the need to save for care and facilitating financial sector involvement.
This, in itself, should increase resources for prevention and early intervention, but latest reports suggest Government may delay full reform until 2025! That would be outrageous. 70% of emergency hospital admissions result from older people having a fall. If they had better facilities at home, many of these could be avoided, saving a fortune to the NHS. Reform is urgent.
Finally, I think Ministers should introduce special measures for the older unemployed. Of course it is absolutely right to be worried about youth unemployment, but we must not forget the needs of older workers too, facing significant labour market discrimination. If they cannot find work, and have low savings, they could be consigned to decades of poverty. They are often left without help or hope, while attention focuses almost exclusively on the young. Later-life retraining, facilitating part-time working for older workers and encouraging more flexible working would all increase their employment chances.
The reforms that I have suggested could certainly improve many people’s quality of life in 2012. Let’s hope it will be a better year.