Work more, save more – or die poor

2004

Work longer, save more, pay higher taxes or accept poverty in old age. That is the blunt message delivered by the long-awaited report of the Pensions Commission into Britain’s yawning pensions crisis.

The Commission, established two years ago under former CBI Director-General Adair Turner, has painted a bleak picture of inadequate pensions provision, warning that unless politicians grasped the nettle of reform, workers will suffer a 30 per cent cut in their retirement income over the next 30 years.

  The Commission's Report
Key Facts
Executive Summary
Full Report
Appendices
"If we want pensioners to be on average as well off as today, but keep retirement ages totally unchanged, the percentage of GDP transferred to normal retirement age pensioners would have to rise from 9.9% today to 17.5% in 2050,” the report said.

Such a rise would cost some £57 billion a year, the equivalent of a 17p rise in income tax or a three-fold increase in private pension contributions.

Alternatively, “if we want to keep pensioners as well off relative to average incomes as today but we do not increase taxes or savings rates, the average age of retirement would have to rise from the current male average of 63.8 to 69.8, in addition to the current female average of 61.6 rising to equal the male level."

But in a thinly-barbed attack on the government, the report says that policy decisions had only made matters worse. "There are big barriers to the success of a voluntary pension saving system", it said, notably "the bewildering complexity of the UK pension system, state and private combined."

In particular, it said that the Chancellor’s obsession with means-tested benefits "increases complexity and reduces, and in some cases reverses, the incentives to save via pensions which the tax system creates."

The report also highlights the crisis of confidence in the pensions and savings industry. Private pensions were becoming less generous as companies were unable to afford them, while “the fools' paradise of overvalued equity markets has come to an end", pushing the burden of pensions increasingly onto individuals and away from their employers.

Indeed the report estimates that some 11.3 million Britons including 1.7 million self-employed people, are not paying into a private pension scheme at all, something that would only make matters worse over the coming decades.

Of the 12 million workers aged over 25 who were not saving enough for retirement, almost two thirds making no contributions whatsoever, while a further two thirds of men between 36 and 45 earning between £17,500 and £25,000 are not saving enough.

Faced with the increasing proportion of the population aged over 65, society and individuals must choose between four options, the report said.

Either pensioners will become poorer relative to the rest of society; taxes and National Insurance contributions devoted to pensions will have to rise; savings will have to rise; or average retirement ages will have to rise.

"There are no alternatives to these four choices. If we do not raise tax rates, savings rates or average retirement ages, pensioners will on average suffer about a 30% decline in their incomes relative to average incomes between now and 2035.”

And it added, “the first option (poorer pensioners) appears unattractive; and there are significant barriers to solving the problem through any one of the other three options alone. Some mix of higher taxes/National Insurance contributions, higher savings and later average retirement is required.”

But realising that attempting to make up the shortfall through taxation would be politically suicidal, the government already appears to have ruled out tax rises.

As the report acknowledges: "The present level of pension right accrual, private and state combined, will leave many with inadequate pensions. And there are likely to be limits to solving the problem solely via increased retirement ages. If state system plans are taken as given, a higher level of private saving is required."

With firm recommendations only being published in the Commission's second report in Autumn 2005, politicians will have plenty of time to ponder one final message.

"Unless new government initiatives can make a major difference to behaviours it is unlikely that the present voluntary private system combined with the present state system will solve the problem of inadequate pension savings."

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