PENSION CRISIS: DON’T BLAME THE WORKERS
Professor of Accounting
(Published in The Tribune, 29 July 2005, p. 8)
The impending pension crisis has been portrayed as an economic crisis rather than a failure of political policies. Instead of blaming employees for not saving enough, living too long and having the audacity to retire at the age of sixty-five, attention needs to focus on the policies that have nurtured the crisis. These include inequalities in income and wealth distribution, regressive taxation, wealth transfers from employees to companies, abuses in the financial sector and the investment of pension savings in the stock markets.
Ordinary people would love to save for old-age but most barely earn enough to afford a house, high transport and energy costs or educate their children. This hardly leaves enough to save for a pension. The average annual wage of £25,000 is distorted by unrestrained fat-cattery at the top. Nearly 60% of British workers earn less than the average wage and cannot afford to enter the housing market. Where people can afford to buy a house, 20% - 40% of their income is taken up by mortgage repayments, leaving precious little to put away for pensions. Young workers, those on minimum wages and in the retail and hospitality industries can only dream of building a pension pot.
The proportion of people with low incomes has remained roughly constant since 1979, despite an average income growth of over 40 per cent. The wealthiest 20% of the population earns 17 times as much as the poorest 20%. The national share of the wealth of the poorest 50% of the population has shrunk from 10% in 1986 to 5% in 2002. A large section of the population simply does not have the means to save enough for a pension. Successive governments have done little to reverse income inequalities and create a climate for ordinary people to save for pensions.
The regressive taxation policies of successive governments have further eroded the ability of people to save for pensions. Around £100 billion of taxes that could provide generous pensions for all are evaded or avoided by multinational corporations and rich individuals. Rather than tackling the abuses, governments have shifted taxes on to labour, small and less mobile businesses. Despite record economic growth and increase in corporate profits, the 1990-91 corporate tax take of £21.5 billion increased to £33.5 billion in 2004-05. For the same period, the income tax take increased from £48.8 billion to £122.8 billion. Individuals on the minimum wage end up paying 10% of their income in tax and national insurance contributions, whilst 65,000 wealthy elites living in Britain but pretending to be domiciled elsewhere pay little or no income tax. After taking account of indirect taxes (e.g. VAT) the top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. Yet the government makes no connection between its tax policies and the pensions issues.
Pension contributions by employers are part of a legal and moral contract, but successive governments have enabled companies to transfer huge amounts of wealth from employee pension schemes to shareholders. In the 1980s and 1990s, many companies took pension holidays i.e. they did not pay the agreed amounts into the pension schemes. At the height of the stock market booms, many also expropriated pension scheme surpluses to enable them to boost profits, dividends, executive salaries and bonuses. Employees have been left with inadequate pensions. No company has made good the expropriations and no company or executive has been prosecuted for such transfers.
To build a nest-egg, many people put their savings in commercially marketed pension schemes, endowment mortgages, insurance policies or specialist bonds. But such savings are not safe and do not guarantee an adequate return. Nearly five million people have lost some £13 billion in the pensions mis-selling scandal. Over six million people have been short changed to the tune of £50 billion in the endowment mortgage scandal. The precipice bonds, split-capital investments, Equitable Life and other episodes further show the failures of the ‘light touch’ regulation and governments to safeguard people’s savings. Company executives devising and marketing the scams made millions in salaries, bonuses, perks and profits. None have been prosecuted. None of the offending companies have been wound up to compensate their victims.
Instead of real assets, people’s pension savings are invested in the biggest casino of all times, the stock market. The value of the pension pot is shaped by speculative frenzies and market bubbles rather than investment in real assets. Bankers, financiers and stockbrokers always win because they receive commission whether the securities are bought or sold. The pension fund managers receive lucrative financial rewards for short-term gains, but escape accountability when their gambles don’t pay-off. Such a structure cannot provide a long-term stable pension policy.
The pension crisis is a failure of political policies pursued by successive governments. Reports written by corporate elites may advocate compulsory savings by employees to provide for pensions, but many people are simply not in a position to save. For years to come, many debt-ridden graduates will be busy repaying their loans and thinking about finding adequate housing and raising families rather than saving for their pensions.
Any government addressing the pension crisis needs to reverse the rising income inequalities and end the organised looting of people’s savings by the finance industry. It needs to end the regressive system of taxation that prevents people from making adequate provision for their pensions. It needs to clampdown on tax avoiders to ensure that the democratically agreed taxes are collected and redistributed. To check the stock market bubbles, the government should levy a tax on the speculative flows to fund pensions. It also needs to look at the financing of hospitals, schools, roads and homes. Instead of paying exorbitant sums through the expensive Public Finance Initiative (PFI) and the Public Private Partnership (PPP) initiatives, public assets should be financed directly from employee pension funds. Such a way of financing public assets, provides cheaper money and also increases the pension pots.