Sunday, April 09, 2006
Blair and Brown united in wrecking pensions
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

When did we start speculating about when Tony Blair would step down? The first piece I’ve been able to find came in September 1997, which advanced the view that his real ambition was to be president of Europe. That, to remind you, was just four months after his first election victory, and the speculation has continued ever since.

When, if, Gordon Brown does become prime minister, he can expect more of the same. In fact, I’m almost tempted to write the first “When will Brown step down?” piece now, just to be sure of getting in first.

People tend to take sides when it comes to Blair and Brown, as with Lennon and McCartney, with whom they were famously compared by Bono. One of them, some say, is the true intellectual, the other the frontman. One of them, perhaps, takes the credit for the other’s work. It gets very tribal, even among journalists.

I’ve always thought, however, that when it comes to economic policy, Blair-Brown has been much better than if either of them had had an entirely free rein. Thus, Brown has constrained Blair on Europe, including on the crucial question of whether Britain should have joined the euro.

Blair, meanwhile, stopped his chancellor from raising higher-rate income tax, is more sensitive to the idea that it is possible to overtax an economy (though this does not stop him making spending promises), and is much less statist than Brown. The prime minister’s willingness to explore market-based solutions to public service reform is more economically enlightened than his Downing Street neighbour’s approach, which often seems driven by a desire to end private sector involvement in, for example, health and education.

Blair-Brown has been better, in general, than Brown-Darling is likely to be (Alistair Darling could be Brown’s “safe pair of hands” at the Treasury), or for that matter Brown-Balls (assuming a rapid elevation for Ed Balls, MP and “former” - they still talk - Brown adviser).

On the key issue of pensions, however, Blair-Brown has been pretty awful. If I’ve held your attention so far, don’t switch off now. Blair-Brown presented a united front on the £5 billion annual raid on pensions instituted by the chancellor after the 1997 election. Both thought few would notice the abolition of the dividend tax credit until long after they had left office.

Blair has done little, either, to constrain his chancellor’s enthusiasm for tax credits, including the infamous pension credit. Apart from the sapping effects this extension of means-testing has on incentives to save, roughly a quarter of those eligible do not claim it, often because they are too proud to do so.

Brown, meanwhile, took his eye off the ball when Alan Johnson, the trade and industry secretary, negotiated a deal on behalf of Blair to make peace with the public sector unions by preserving the right to retire at 60 for existing members.
This deal, which sits like a cuckoo in the next of pensions’ reform, is hard to defend. How do you make everybody else accept a later retirement age while preserving retirement at 60 for existing public sector workers? Yet Blair rubber-stamped it and Brown, while privately scathing, did nothing to stop it.

So that is the context in which the two are approaching the issue of reform over the next few weeks, in response to the final report of Lord Turner’s Pensions Commission, published last week.

Turner and his commission colleagues did not produce anything new last week, merely reaffirming their view that an “integrated package” has to be introduced in full, or not introduced at all.

It includes gradually increasing the state pension age to 66 by 2030 and 68 by 2050; a step increase in the basic state pension, and linking it to earnings, not prices; and automatic enrolment of employees into either their organisation’s pensions scheme or a new National Pensions Savings Scheme (NPSS). In either case employers would make a minimum contribution equivalent to 3% of the employee’s salary, employees would be expected to contribute 4% and the taxman 1%.

Within its own parameters, Turner’s solution is elegant. The chancellor says he and the prime minister are 90% to 95% of the way to agreeing on the way forward on the basis of it.

As it happens, Brown is in the right on the 5% to 10% on which he is resisting. If the basic state pension is increased in line with earnings from 2010, as Turner recommends, the additional cost by 2020 would be £7.6 billion a year, in today’s prices. And this extra cost would be incurred (and mean higher taxes) well before people are required to retire later.

There is a case, which is what Brown is arguing, for bringing later retirement and restoring the earnings link closer together, in other words after 2020.
But I also have big problems with the 90% to 95% on which there is agreement. Contrary to the impression that is sometimes given, though not by him, Turner’s proposals would not mean the abolition of the pension credit, merely limit its spread.

They would mean the introduction of the NPSS, on which many people have grave doubts, and not just the businesses which will be required to contribute unless their employees decide to opt out. This differs from New Zealand’s “Kiwi Saver” scheme on which it is loosely based, which does not force firms to pay.
Contributions to the new scheme, though it will be privately managed, with be collected by the government. Extending the generosity of state pensions, whatever the compromise adopted, also means increasing the government’s role in pension provision.

Turner and his colleagues decided that a system of pension provision based on the voluntary principle would not work. They also concluded that Britain’s occupational pensions system, until relatively recently the envy of the world, could never be restored to its former glories.

I wish they had given both more of a run. Perhaps, however, given the damage Blair and Brown have wrought on pensions, they had no choice.

PS The Pensions Commission says housing could make a “significant contribution to pension adequacy” for many people. That’s certainly the case at present. Many people approaching retirement are cashing in on the boom in house prices over the past decade by choosing this moment to downsize. For those lucky enough to be able to do so - and the point about such gains is that they are unevenly distributed - this is a golden time to retire.

Mind you, there is no sign so far that the housing market has given up on us. The Halifax reported a 0.9% rise in prices last month, taking the annual rate up to 6.2%, compared with a low of 2.3% last summer. Those who thought the slowdown in London prices was a prelude to a more general cooling or even collapse have been proved wrong, and over the past 12 months prices in the capital have risen by 7.2%, compared with 1.1% over the previous 12 months. The real boom over the past 12 months, however, was in Northern Ireland, with figures from the Nationwide showing a rise of 17.6%.

The puzzle is that this revival is occurring against a backdrop of subdued consumer spending. Bank of England figures showed a rise in mortgage equity withdrawal to £11.8 billion or 5.6% of post-tax income in the fourth quarter of 2005, up nearly £3 billion on the previous quarter. That may help explain the Christmas spending flurry but sits uneasily alongside weak spending since.

Perhaps people are genuinely taking money out of the housing markets to set aside for a rainy day. Or maybe there is a worry that things aren’t going to remain as benign for ever. Last week’s fall in the pound to its lowest euro level for more than a year was a gentle reminder of past volatility and the potential for future problems.

From The Sunday Times, April 9 2006

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