Pensions Crisis or Social Security Reform?

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April 10, 2005 17:15 | by Frank Andrews

Using the example of the UK, Frank Andrews looks at how social security systems might be made fairer, more effective and more efficient.

Introduction

As the proportion of people over sixty years old in EU countries increases, something of a panic has set in concerning how to provide adequate pensions. The thesis of this article is that this problem cannot be solved by tinkering at the edges of the tax/benefit systems. A fundamental overhaul of social security is needed to solve the problem. The growing numbers of over-60s can wield a formidable amount of political influence in democracies, so it makes no sense to treat them as a marginalized group - in some countries they already constitute over a quarter of the adult population and this proportion is set to grow further. The danger is that the solidarity that exists between generations will be fractured by demographic pressures and I am therefore proposing a more inclusive tax/benefit system composed of three main parts:

1) A citizens' income 2) Special benefits for disability, childcare, housing costs, and community care. 3) An improved regime for occupational pension, private pensions and savings.



This analysis relates mainly to Britain but could be adapted to be relevant to all economically developed societies.

Citizens' Income

The idea of a citizens' income is of course not a new one, but in this version its major contribution would be to supersede state retirement pension and the plethora of contributory and means-tested benefits with the exceptions that I will outline in the second section of this article. in the UK, for example, It would allow for the abolition of the National Insurance Scheme and a vast amount of central government bureaucracy. It would integrate social security provision for over ninety per cent of the population.

It is envisaged that all citizens over eighteen years old would automatically qualify for a citizens' income set initially at the rate of the single person's guaranteed pension credit - at present about £430 pm, about Euros 650. Other countries would need to set a suitable rate, taking into account national income and the cost of living. This would be upgraded on an annual basis in line with the increase in average earnings. It would be tax free and disregarded for means testing.

The citizens' income would be administered by the state fiscal services and would be subject to the following restrictions on its universality:

(i) A clawback would be instituted on a tapered basis when an individual's income exceeded a certain amount - in the case of the UK in 2005, this would be around £2,500 pm (Euros 3,800) gradually tapering to nil at £5,000. There would be no limits on capital. The claw back would be integrated into the income tax system.

(ii) Overseas workers would be able to qualify for the citizens' income after a period of proven income tax contributions to be determined by reciprocal agreements with non-member states and either bilateral arrangements between member states or, ideally, an agreement at EU level.

(iii) People over sixty would be paid their citizens' income if they went to live overseas without a time limit as long as they had a proven income tax record of at least 10 years before their 60th birthday. People under sixty would be subject to time limits depending on reciprocal agreements and European Union rules if they went abroad.

(iv) People in hospital for over 52 weeks would cease to be paid until they were discharged. Also, people in permanent residential care or nursing home care and prisoners would cease to be paid until discharge.



I will deal with the consequences of some of these restrictions in the next section but for the vast majority of citizens the citizens' income would be a safety net to rely on throughout their adult lives.

Disability, Childcare, Housing Costs, and Community Care

In the British system, disability living allowance would be essentially unchanged. It would be assessed on medical criteria as it is now and would be tax free and disregarded as income for means tested benefits. Child care assistance would be provided by a child benefit which would be tax free and disregarded as income for means tested benefits. If this was set at, say £120 a month, a single parent with one child would be entitled to receive the citizens' income of £424 on top of this. Child maintenance costs from an absent parent would be disregarded as income. The citizens' income system would facilitate the recovery of maintenance payments by the child support agency because the absent parent would have to forego his or her entitlement to citizens' income in order to evade paying maintenance.

Housing and related benefits could be consolidated into a single housing costs benefit which would also include assistance with mortgage interest. This would be means tested at the local authority level.

The local authorities would also be given funding and responsibility for administering an expanded community care system. They would, as at present, run the funding of residential and nursing home care and also be responsible for hardship funds to alleviate the situation of people not entitled to the citizens' income i.e. overseas workers who fall sick before paying income tax for the qualifying period, people recently discharged from hospital, ex-prisoners, etc. The function would dove-tail with taking over the present responsibilities of "the social fund" which gives out community care grants, crisis loans, etc. All of these benefits would be means tested taking into account the disregards on citizens' income, child care, and disability living allowance.

Occupational Pensions, Private Pensions and Savings

The last ten years has produced a growing list of pension scandals in the private sector from Robert Maxwell's criminal pillaging of the Mirror Group occupational pension fund to Enron's elaborate fraud in the USA and Parmalat in Europe, to the misleading methods used to sell endowment policies and Equitable Life's near insolvency. An independent observer could only conclude that the private sector has proved unfit to deal with lifetime contributions to occupational pensions and private pensions. Nevertheless, private companies will continue to find pension provision useful in attracting and retaining staff and workers will continue to want to provide for their retirement.

My proposal on occupational pensions is that in order to retain tax breaks on contributions private companies would have to pay into regional public schemes. The regional public schemes would be based on the existing local government pension scheme amalgamated with the teachers' pension scheme and a regionalised National Health Service and civil service pension scheme. This would provide a strong financial basis for the private firms to buy into. It would also be possible to devise a system whereby contributions are easily transferable geographically from region to region and also internally with the fund in the event of redundancy, insolvency, takeover, or merely changing jobs.

In this system employees' contributions would be secure and relatively high standards of public pension schemes could be universalized.

Financial products which are aimed at providing income or lump sums for the over 60s should be strictly regulated so that they have to obtain prior approval by the financial services authority before launching them on to an unsuspecting public. This approval should be made more meaningful by an explicit liability imposed on the financial services authority, and therefore the government, to compensate for further losses not envisaged in the terms of the products.

Incentives to save could also be improved by an extension of the cash element in the individual savings accounts the full allowance for tax free savings.

Affordability

The immediate reactions I expect to encounter to these proposals are shock and horror at the costs involved; but consider the following:

The citizens' income would replace retirement pension, working tax credit, child tax credit, pension credit, Job seekers allowance, statutory sick pay, incapacity benefit, income support, and numerous other benefits and their equivalents in other national systems.

The citizens' income card would virtually be a national identity card and I would advocate mandatory jail sentences for employers who fail to deduct income tax. The provision to establish a proven tax record would provide a big incentive for overseas workers to work legally. National Insurance and its equivalents would be abolished along with the contributory benefits and this would be made fiscally neutral by an equivalent increase in income tax and corporation tax. All this would bear down on the "unofficial economy" which contributes nothing to the treasury, and about which the European Commission in particular has repeatedly expressed concern.

The entitlement to the citizens' income from the age of 18 would also alleviate the problem of funding for students, reducing the extent to which they would have to take out loans to support themselves through higher education. This would result in the unquantifiable benefit of encouraging higher education for students from poor backgrounds and minimising the financial pressure on low income households of putting their children through university.

Conclusion

I have attempted to outline an alternative social security system that would integrate the age groups in society. It would also encourage integration of immigrant labour into the official economy. It would replace the present inadequate systems of contributory benefits but would encourage lifetime contributions to a secure second pension; it would be redistributive in that it would be funded by progressive income tax and corporation tax. It would also be much simpler and easier to understand in that broadly speaking the central government would deal with benefits which are non means tested and local government would deal with means testing, though of course this would vary from country to country. Whilst it would not in itself be cheap to run, it would significantly reduce the bureaucratic waste inherent in the present ad hoc jumble of benefits and pensions, a particular problem in the UK but one which to some extent afflicts almost all systems. Hopefully the fact that it would be simple enough for people to understand and fair enough to involve the whole population would make the costs acceptable and not resented by the vast majority.

The author, Frank Andrews, is a Welfare Rights Officer in the north west of England.



See also:




Pensions Crisis?

Alternative European Economic Policy