02 December 2005
Lord Turner's suggested remedies for Britain's retirement crisis could cost taxpayers an additional £20bn – putting ministers under renewed pressure to withdraw the recent deal to protect public sector pensions.
The independent Institute for Fiscal Studies assessed the Pension Commission's suggested overhaul of retirement planning – including proposals to raise the basic state pension age to 68 by 2050.
It calculated that future governments would need to increase the level of gross domestic product spent on pensions from 6.2% at the moment to around 7.8% – equivalent to £290 per person per year.
Carl Emmerson, deputy director at the IFS, told Public Finance that this was the equivalent of tax increases in excess of the total tax rises imposed by the Labour government since it came to power in 1997. However, Turner's suggested increases would be spread out over a longer period – around 45 years.
Emmerson said: 'Our estimate is that it would cost an additional £20bn if we assume that the commission's “model” state pension age of 68 is introduced in future. It's a matter of political judgement whether this kind of additional spending is considered affordable.'
Despite assurances from Work and Pensions Secretary John Hutton that Turner's proposals were 'the right basis for the debate to come', leaked Treasury memos have indicated that Chancellor Gordon Brown is reluctant to oversee a dramatic rise in pensions expenditure when the government responds in the spring.
Unveiling his long-awaited proposals on November 30, however, Turner threw down the gauntlet to potential political opponents.
'The long-term range we suggest for debate is 7.5% to 8% of GDP spend. Different people will make different judgements on the trade-off [between funding such pensions and other public expenditure],' he said.
'But unless people are willing to discuss it, they are not serious participants in this debate. They are indulging in fairytale economics – in which a fairy godmother makes all difficult choices disappear.'
In light of the rising potential costs to taxpayers, actuaries, business lobby groups and opposition parties have called on the government to rethink the recent agreement, brokered by Trade and Industry Secretary Alan Johnson, that current public sector workers can continue to draw pensions at 60.
Douglas Anderson, partner and head of public sector consulting at actuaries Hymans Robertson, told PF that pressure on Brown to alter the public sector deal would become 'intense', following Turner's recommendation on the state pension age.
'The government's… decision to protect all existing civil servants, NHS workers and teachers from a rise in their retirement age to 65 – and pass the buck to future recruits – looks all the odder if the state pension age is to rise,' Anderson said.
'If retirement culture is to change, to put our society and economy on a sustainable footing, we need some robust leadership from the government on its own employees.'
But Jeannie Drake, former president of the Trades Union Congress and one of the three pension commissioners, told PF: 'People must be careful not to blur these separate public sector issues with our broader retirement proposals – the two sets of considerations must remain separate.'
It has been reported that up to 12 million people are not saving enough for an adequate income at retirement.
But Turner, speaking at the launch of his report, said: 'It is wrong to talk about a [current] “crisis” of pensioner income.' However, he made it clear that people should be required to work longer, pay more taxes and save more if they are to enjoy sufficient retirement funds in future.
As well as an increased state pension age, Turner's 450-page study, A new pensions settlement for the 21st century, recommends the establishment of a National Pensions Savings Scheme, into which all workers [except the self-employed] would be automatically enrolled, but with the option to opt out.
The NPSS, Turner suggests, should require employees to pay in 5% of their pre-tax income, while employers should pay an additional 3%.
Other proposals include making future entitlement to the basic state pension universal and based on residency, not on contributions. This would help to remedy the pension problems suffered by many women. Retention of the state second pension is also floated.
Restoring the link between the basic pension and earnings, another recommendation, is politically controversial. It is this recommendation that has reportedly fuelled Brown's opposition to Turner's plans – as this alone would require significant tax rises.
PFdec2005
