Is compulsion a sensible way forward?
by Dr. Ros Altmann
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COMPULSION COULD BE A DISASTER FOR PENSIONS
Unions are recommending that the Government should introduce compulsory pension saving for all employees. Such a policy change would make a bad situation even worse. It would merely prolong the current system and postpone a required radical overhaul.
Our pension system is not working properly and just compelling people to put money into it will not make it work better! We have had so many of these knee-jerk panic reactions to bad pension headlines (like pension credit as a reaction to the 75p rise in basic pension) which end up making things worse.
We need a radical overhaul of the entire way we think about pensions. What we have is really a ‘retirement’ problem, rather than a ‘pension problem’. We are trying to make pensions last too long and it is simply not possible for average earners to save enough during a relatively short working lifetime, to support themselves at a decent income level for 20 or 30 years of retirement. Saving 15% of salary for 30 years, will not generate a generous pension that can last 30 years in retirement.
There are many reasons why compulsion could actually make things worse.
- Compelling people to save 10% or 15% of their salary would be devastating for economic growth (as the Australians found when they introduced compulsion). The sudden diversion of income from consumption to savings would be likely to severely damage economic growth.
- Even saving 10-15% of salary, will not guarantee that people will end up with a decent pension later on. People could end up severely disappointed with the amount of pension they receive, since pensions are trying to last longer and longer.
- In the current policy environment, compulsion cannot be considered at all. The extensive means testing of older people (over 75% of pensioners will be entitled to pension credit by 2040), will reduce any final pension income by at least 40% and for many people even tax the whole of the pension away. At the moment, for the majority of the population, pensions are not a suitable product and saving in a different form would be much better.
- There is very little evidence the compulsion actually works – it does not appear to raise the overall savings ratio, but just re-directs saving from one form to another.
- Compulsion would be seen as another tax. Even if the contributions only come from employers, this must either reduce take-home pay (if employers keep salaries the same, and put 10% into a pension instead of into the pay packet) or on job security (if employers are forced to absorb the cost of high pension contributions).
- We already have compulsion, in the form of National Insurance contributions. These contributions should be better used to provide a higher pension and do away with the means testing for older pensioners – say those over age 75.
We are wasting huge amounts of money, which could be re-directed. We currently spend £38billion on the basic state pension. But we spend over £20billion on pension tax relief and National Insurance rebates. Diverting this expenditure to pension spending, would free up significant extra resources to tackle the problem and set policy on a more sustainable footing.