Channel 5’s latest reality TV programme sounds as if it will provide a greater-than-usual insight into the problems faced by ordinary people, even if the topic of pensions normally struggles to get the pulse racing in quite the same way as whatever topic can provide screen time for angry, upset or good looking people.
Britain’s Great Pension Crisis will focus on one of the problems that people nationwide will face: not having enough savings during their retirement. This is despite most people having private sector pension pots and the state pension costing an extraordinary – and ever-rising – £113.6 billion.
At present, the average pension pot is £61,897 when first accessed, which equates to just £2,500 a year. This is barely a quarter of the amount that would supposedly allow one to live “comfortably” (though as a caveat it should be noted that many people have multiple pension pots). It is, of course, a deep concern for swathes of the public. And Channel 5’s programme will apparently highlight the importance of savings to the young and middle-aged by getting them to live off what their present savings rate would allow them to live off in retirement.
What is also worth noting, however, is that retirement savings are far less of a concern for public sector workers. In 2017, public sector pensions alone cost £38bn, greater than the cost of all bar four government departments.
Remarkably, public sector employees on the exact same salary, starting at the exact same time, get pension pots roughly three times the size of their private sector equivalents. Furthermore, public sector pensions are for the most part “gold-plated” and defined benefit schemes, meaning that workers are guaranteed a certain percentage of their salary in retirement, based on the number of years they worked.
Such risk-free pensions make up less than seven per cent of private sector pensions, which are for the most part defined contribution schemes, meaning the money received in retirement is based entirely on the amount of money in the pension pot. If the pension investments go badly, the size of the pot goes down, and as such it’s much more difficult to relax in the foreknowledge of exactly what your pension will pay out.
Unfortunately for taxpayers, the nature of defined benefit schemes means that the government has promised to pay an extraordinary amount of money to its employees.
The current liability – the amount that the government has promised to pay public sector employees in pension funds once they retire – is £1.7 trillion. Included in this figure are cases of largesse bound to frustrate any hard-working private sector worker panicking about what they will live off in old age.
The TaxPayers’ Alliance’s publication on mandarins’ pensions pots revealed that the typical head of a Whitehall department has a pension worth over £900,000. 14 of the 22 Sir Humphreys will receive lump sums averaging £148,000. Former work and pensions permanent secretary Sir Robert Devereux left with a £1.8 million pot when he retired six years early, aged 61, in 2017.
The liability that the public sector has racked up will have to be funded by the only source of revenue available to the state: taxes. As such, today’s youngsters will be spending their working lives paying extra tax to fund the pensions of older, richer mandarins.
Channel 5 is doing a public service emphasising the risk of individuals not saving, but the service would be that much greater were they to highlight the ridiculous pensions racquet.
The tax burden is an extraordinary 34.4 per cent of GDP – higher than it has been for fifty years. Pension funding of public sector and state pensions accounts for over 15 per cent of government spending – and that is rising swiftly. The state pension “triple lock” is ensuring that the cost of state pension provision is rising at an increasingly unsustainable rate, damaging the public finances and accentuating so-called “intergenerational unfairness”.
For workers to have enough spare money to be able to adequately save for their retirement, they are going to need their tax burden to be reduced.
A means of reducing spending and therefore making tax cuts possible, in a manner that would disproportionately aid the young, would be to reduce the amount the government hands out in pension contributions.
Another means of reducing the financial bias against the current working population would be to scrap inheritance tax. Putting aside arguments about the morals of the tax, it is one of the few that is paid exclusively by non-pensioners.
Left-wingers demand higher inheritance tax in order to penalise the rich and elderly, but in reality the people most penalised by inheritance taxes are younger generations. Would it not be a more effective means of sharing their wealth to allow rich pensioners to give away their money to younger, poorer family members?
If Britain’s current workers, AKA its future pensioners, are going to have enough to live “comfortably”, they are going to need to save and invest, as tonight’s show will doubtless emphasise. In order to do so, they will need a higher standard of living than they have currently. The practical way to make this possible is to reduce their tax burden – a burden that is so heavy that the bottom income decile pay 47 per cent of their income in taxes.
The current system of taxing high and splashing out on government-funded pensions is self-defeating. Reducing the pension burden would be one of the most efficient ways of saving the government money, allowing for the tax cuts that will, in turn, allow people to save adequately.
