Pensioner power

George Osborne’s conference speech earlier this week brought back memories of a paper that was published by the IEA back in 2011 called Sharing the Burden which caused something of a storm. The paper proposed both cuts in pensioner benefits and long-term reform to pension systems. It pointed out that though there had been quite significant cuts to benefits to people of working age, older people had seen benefits increased in real terms. The most obvious example of this is the ‘triple lock’ on pensions which raises pensions by the higher of wage increase, price increases and 2.5 per cent. This paper produced quite a reaction – dozens (if not hundreds of letters), a substantial amount of abuse and even one death threat. However, its basic messages were sound. If public finances are to be brought under control, the benefit bill to older people cannot be ignored; long-term reform of pensions systems is desirable in any case; and the government has created a benefits and pensions systems which is a complete mess and economically incoherent.

In his party conference speech, George Osborne once again exempted older people from proposals for further benefit cuts. Occasionally, one hears objections from people (in all parties) who argue that benefits for richer people must be ‘examined’. However, removing the winter-fuel allowance from the top 10 per cent of the population will achieve little (other than increasing the complexity of the system further). More radical action is needed, including:

– The replacement of the state pension system with funded provision, phased in over a generation or two. This was Conservative Party policy in the 1997 and 2001 general elections. Whilst the state pension remains in place, increases in its value should be limited to increases in an appropriate prices index.

– The replacement of all other pensioner benefits by a single cash benefit which is subject to similar restraint as that applied to benefits paid to people of working age.

– Reform of the planning system in order to reduce housing costs and therefore reduce living costs for pensioners as well as reducing the housing benefit bill.

Unfortunately, none of this is likely to happen. The Conservative Party may be imprudent when it comes to the nation’s finances but they are not the stupid party. A very important graph necessary to understand the current political debate was published in a paper in the IEA’s journal Economic Affairs in 2008. The paper explains much of what is important about the current political debate and the difficulty of deficit reduction.

Assuming no migration (and migrants tend to be reluctant to vote in the first generation) and adjusting for the propensity of older and younger people to vote, over 50 per cent of voters will soon be within ten years of state pension age. The Conservative Party are simply the most extreme example amongst all the political parties of trying to attract a group of voters who have relatively coherent preferences (that is, there are a relatively small number of issues that affect older voters’ welfare).

The title of this article was The Young Held to Ransom and a sister article published in an IEA monograph was called The Impossibility of Progress. And this is the problem. When the majority of welfare spending is on pensioners, how are the public finances put in order when it is very difficult for governments to obtain a majority without popular support amongst older voters?

There is (a narrow) way out of this problem. Indeed, economic theory predicts exactly the policy the government is following. Governments in this situation will raise the state pension age. They will be able to ‘get away’ with this because the pensioner voters will not be affected. If the move is phased in, other older voters will not be affected either and younger people (if they vote) will regard the prospect as so far distant that they will not care.

So, the most politically viable strategy to put the public finances in order is to raise state pension age much more rapidly than currently planned to 70 (currently, the plan is to raise state pension age less rapidly than life expectation over the next few decades) and thereafter immediately adopt the policy of tying state pension age to life expectation (as proposed in Sharing the Burden and now adopted as an aspiration by the government). In other words, the government’s proposals on raising state pension age must be strengthened.

But, at the same time, the government really should not shy away from doing what is necessary to reduce spending on the older population. Most obviously, it should remove the triple lock on pension increases which is a policy that has no justification other than that of vote harvesting. It should also re-find its radical edge and develop proposals to move towards a funded pension system over the coming generations.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.