We are not saving enough for our pensions, says the Government, and it is right. Nearly half of all working-age adults are not saving anything at all, and unless something changes, the next generation of pensioners will be significantly poorer than today’s.
So it is setting up a new Pensions Commission along the lines of the one in 2006 that suggested people working in the private sector should automatically be enrolled in a pension scheme. The Commission will look at the numbers and report on what’s to be done by 2027.
It’s a bleak message and one that cuts right across the way National Insurance has been traditionally presented: that when you are working you pay into a fund that will cover your unemployment and health benefits, and support you with a decent pension in old age.
The problem is that there never was a fund – each generation of working people has always had to pay the pensions of the previous generations – and as people live longer that means higher and higher taxes on wages. Even if the retirement age goes up further, which it will, whatever the Government provides won’t be enough. People have to save more so they can top up their state pensions.
This is not something that any government wants to acknowledge. Taxation as percentage of GDP is already heading for the highest level since the late 1940s. The idea that people still have to pay all these taxes, and on top of all that set aside more money for their old age is not an attractive proposition. So it makes sense to try to distance the Government from the decisions by setting up a Pensions Commission (it says it is “reviving” the 2006 Commission) to tell it what it should do.
We will have to wait two years for it to report, but actually it’s not hard to see what it is likely to say. There may well be a suggestion that the increases in state retirement age should come through even sooner. There may be something on that third rail issue, the triple lock on the state pension, whereby it increases by whichever is highest of average earnings, consumer prices, or 2.5 per cent. But the main thrust of its recommendations is likely to be that everyone in workplace pensions should save more. After all, its idea of auto-enrolment is seen as a great success, increasing the proportion of employees in a pension scheme from 55 per cent in 2012 to 88 per cent now.
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So what’s likely is that it will suggest that it should be harder to opt out, that both employers and employees should contribute more, that there should be some way of extending the idea to the self-employed, and that there should be a special focus on groups of people that are under-represented at the moment. The Government announcement noted that there was a pensions gap between women and men, that only one-in-four low earners in the private sector were saving for a pension, and that the proportion of people in the Pakistan and Bangladeshi communities saving for a pension was similarly low.
There’s nothing wrong with all this, though it’s a tough message for families that are already struggling on low earnings to tell them that the state won’t be able to pay them a decent pension – that they have to tighten their belts and save more. There must be a worry, too, that requiring higher pension contributions from companies will have a similar impact as the increase in National Insurance Contributions that they now have to pay: that many will cut their workforce and unemployment will start rising.
The challenge, however, goes beyond pensions. To make this work there will need to be a change of mindset. Somehow the Government has to get over the idea that people have to take responsibility for their living standards in old age if they possibly can. Of course not everyone can do that and the state has to be a backstop.
But the Government has to say that it has reached the limits of taxation. This means not only explaining that it simply isn’t fair to load more taxes on working people, the message it is trying to get over at the moment. It also means saying there is no other source of revenue. That is a tough one too.
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