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Pensions pain has to be shared by us all

Newspaper article

More than 150,000 people have signed a petition protesting about the impact of increasing the female state pension age. It is rising from 60 to 66 over the course of this decade, for those born in the 1950s. The petition states that while agreeing with the principle of equalising female with male state pension ages, the lack of personal notice and the speed with which the changes are being implemented means that “retirement plans have been shattered with devastating consequences”. This despite the fact that the increase from 60 to 65 at least was announced more than 20 years ago.

This sense of outrage neatly encapsulates a wider problem. Those currently in their sixties have, in general, benefited from generous occupational pensions and rising house prices as well as higher state pensions and increasing life expectancy. Not all of them of course, but as a generation they have done well. Younger generations are paying for those pensions and are disadvantaged by high house prices. But would it be reasonable to tackle this by, for example, reducing occupational pensions in payment, or imposing taxes on capital gains already earned on first homes? The immediate reaction of many would be a clear no. That would be to break a promise, explicit in the first case, implicit in the second.

The fact that much of the good fortune of the older generation results from policy mistakes and unexpected changes of circumstance seems hardly relevant. Pension promises were made with no thought to the consequences of rising longevity and long-term poor stock market performance. Nobody expected us to end up in a world in which pensioners are better off than the rest, in which house prices have reached such extraordinary levels, in which earnings have barely shifted in more than a decade — in part because of the costs of paying pensions.

But a promise is a promise. In a western democracy we honour accrued rights and legitimate expectations. We undermine such rights and expectations at our peril. But when we allow the state to impose taxes on us, these ideas are not as straightforward as they seem. We accept that policy can change. Increases in VAT may not be welcome, but we accept they are within the ambit of reasonable political choices. Yet increasing VAT reduces the value of savings made in the past. There is some retrospection here.

What about imposing an additional tax charge on private pensions in payment? Arguably an outrageous undermining of perfectly legitimate expectations. Yet is that so different to reducing future opportunities for tax-privileged saving by current workers? Many will have planned their affairs on the basis of the system as it stood. Changes of the latter sort are frequent. Changes of the former sort rarely happen. But the difference is one of degree not of kind.

Where we draw the line matters. If we treat all rights already conferred as absolute, and any change affecting future earnings or savings as fair game, the consequences will be profound. Wealth will be increasingly concentrated in the older generation. Inheritance increasingly will be important for the next generation. We are in danger of returning to a world in which your parents’ wealth will matter more than anything you can do in determining your long-term financial security.

We may well think that these promises and expectations should outweigh all other considerations. There are genuinely good reasons for thinking this. But we should think much more seriously and clearly about where
we should set the boundaries. At some point the cost of keeping a promise can exceed the cost of breaking it, or at least of taxing it.


This article was originally published by The Times

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