Jan 282013

Here is another post on the Intergenerational Foundation’s blog:

InterGen tweet

The blog post appears to have been triggered by, and certainly quotes, a shoddy article “INSURANCE OR RIGHT?“, based on 1908 pension law,  at the Longevitas Ltd website. Then it appears uncritically to assume this demands an urgent national debate. The UK has been debating state pensions for the last century; why does re-examination of a 1908 law warrant such an urgent debate? What new information renders the results of previous debates invalid?

In summary, the Longevitas article says:

“At the root of this problem is the little-discussed question of whether an old-age pension is an insurance or a benefit of right. When the first UK-wide state pension commenced in 1909, a twenty-year-old male had a 34.8% chance of surviving to the then-pension age of 70. Once retired, a seventy-year-old male had a life expectancy of 8.0 years. The original state pension in the UK therefore had the hallmarks of a social-insurance system — the probability of surviving to receive the pension was relatively modest. The system as constructed was affordable not just because survival probabilities were low and life expectancy was short, but also because benefits were means-tested….

“This then raises a question: what would the state pension age have to be to restore the eight-year life expectancy of the original Old-Age Pension Act of 1908? The answer is 80 years old, and a twenty-year-old male would have a better than evens chance (54.5%) of reaching that age.”

The Intergenerational Foundation’s blog post changed this to the following:

“The UK government would have to increase the state pension age all the way to 80 if it wanted to keep the proportion of people who receive it to the same level as when it was first introduced in 1908, according to a recent article from the think-tank Longevitas.”

The Intergenerational Foundation’s blog post erroneously equated restoring the life expectancy at state pension age with restoring the proportion of people who receive state pension. There are surely some obvious questions about either comparison:

  • Who says the life expectancy (or proportion) of people who received it in 1908 has the slightest relevance to 2013 and beyond? No logic is presented for this!
    (What other values should revert to their 1908 values? Years in full time education? Number of people in agriculture? Proportion of freely available medical practitioners?)
  • Why is the state pension assumed to be either “insurance” or “right”? Why not “part of a system of funding retirement based on a social contract”? Or “a small but safer supplement or alternative to private pension provision”?
    (Note that the 1908 pension was means-tested and non-contributory).
  • Why is it thought that raising the state pension age to 80 is the only way of catering for an aging population? There is no evidence that the 1908 8-year life expectancy was the right one even then, and there is no reason to believe it is the right value now.
    (Perhaps we have become more enlightened over the last century!)

The Intergenerational Foundation’s blog post links to another blog post by the same author (David Kingman): “What can we learn about pensions from the Victorians?” These articles don’t query why we have moved on over the last century. Might there not have been good reasons, including the hardship caused by the original scheme, or the introduction of the concept of contributions and National Insurance? And they don’t discuss the perverse incentives arising from means testing, which are likely to discourage investing in one’s own future if this reduces what one can get from the state.

The state pension system needs to move forward from where we are now, not revert to a system that was superseded long ago. Any new pension system must take into account the decades of contributions via National Insurance that has entitled many millions of people to a state pension under the social contract.

Note that there is a redistributive aspect to the NI and state pension system. Higher-rate taxpayers build up years of entitlement at the same rate as lower-rate taxpayers, and with the new flat-rate scheme being introduced this is more pronounced because the extra state pension that better-off people could accumulate no longer exists. (And, of course, state pension is taxed as income).

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