The Laura Perrins Interview: James Bartholomew on Britain’s pensions time bomb

James Bartholomew, writer and author of The Welfare State We’re In and The Welfare of Nations 

The Welfare of Nations is now out in paperback

Laura Perrins: The Welfare of Nations is a very thorough analysis of the welfare states of various nations, including Sweden, Switzerland and the US. You compare these with the welfare state of Britain. You have already set out its dire condition in the very well-received The Welfare State We're In.

First I am going to skip to Chapter 8, which covers pensions, mainly because for the rising generation this must be their most pressing concern. The current pension system, much of it unfunded, represents nothing more than a massive transfer of assets from the younger generation to the older one, with particular generosity to public-sector workers. Just how bad is it and what can be done?

James Bartholomew: Younger people are going to pay out a lot of money in taxes and National Insurance to pay the pensions of their parents’ and grandparents’ generation. As if this were not bad enough, they themselves will receive smaller state pensions and/or receive their pensions at a later age. British pensions, like those of many countries, have been ‘unfunded’. The contributions of young people have been used to pay the pensions of old people. This was always an unreliable system and it is now going spectacularly wrong, partly because people are living much longer. According to one expert in this area, the cost of maintaining the current generosity of pension schemes in advanced countries would amount to an increase in government spending of 7 per cent. On past form, a combination of three things will happen:

1. Pension amounts for the current generation of workers will not be fully increased in line with wages;

2. The age at which people receive pensions will rise;

3. Taxes or National Insurance contributions will be raised.

What can be done about it? The fair thing would be for the generation which was too generous to itself to cut back on its own pensions. But politics dominates in pensions, so that is going to happen only to a limited extent.

In the long term, the idealistic thing would be for the country to switch to funded pensions with real choice, along the lines of the Singapore model. All new entrants to the state pension scheme would have their money invested into real assets: shares, bonds, property and gold. This would be for the long-term good of the nation. But it would require real moral fibre and patriotism to make the change. One generation would have to bear the cost of paying the pensions of the old while not expecting the next generation to pay its pensions in turn.

L P: Another chapter of importance and interest is on social housing. You lay out in detail how there is nothing social about social housing. It is often very badly planned and encourages criminality, unemployment and lone parenting. Social housing and planning is a profoundly Leftist idea that has inflicted misery upon generations of children. What can be done?

J B: One thing is being done right now and has been under way for many years: a reduction in the scale of social housing. In Britain, the proportion of people living in social housing has fallen from 31 per cent in 1979 to 17 per cent in 2012. That is virtually a collapse. And the same thing is happening around the world. In Germany, the decline has been even more dramatic. This is welcome.

But now the thing that desperately needs to be done in Britain is to allow permission for many more homes to be built. The cost of bricks and construction is no longer the big cost of building a home, especially in South-East England. The cost of the land and getting planning permission is far greater. We need to find a way of granting more planning permissions for building, which would bring down the cost of building land and hence of house prices. Germany, with a similar population density, has managed it. We need to learn from its example.

L P: In terms of education I think we have seen a big improvement in England, although it started from a very low level. Sweden is an interesting example, I believe, as although it is perceived to be a socialist paradise, it does have a voucher system. Voucher systems are hated by the Left as they allow poor kids to get out of bad schools and into better ones. Do you think a voucher system could ever occur in England?

J B: Free schools are a voucher system by another name. They are still a tiny proportion of all schools but they are a start. They have the scope to be expanded enormously, giving real choice to parents and incentives to the schools to be highly successful. Dramatic expansion of free schools has happened in Sweden. The key thing was this: allowing for-profit companies to set up free schools. That is what made the difference in Sweden. These companies develop expertise in creating new schools and finding innovative places in which to put them. Our government has still been too cowardly to allow for-profit companies. A second necessity is to make it very difficult for local authorities to refuse permission for these schools. In answer to your question: yes, I think vouchers/free schools will eventually expand around the country. I just wish it could happen a great deal more quickly. State schools are leaving about 17 per cent of children functionally illiterate. It is a horrendous waste of human potential.

L P: Towards the end of the book you summarise welfare states as follows: ‘Effectively, money is taken from the poor and then given back to them after a deduction has been granted to bureaucrats, who have charged them for the administration and sometimes added in instructions on where they must live, which doctor they should go to, what school their children must attend and what training course they must do.’

We have had two elections and Brexit since you wrote this book. Do you think there is any hope for the future when it comes to controlling spending, considering that both the debt and deficit are out of control?

J B: I predict a continuation of a cycle we have seen around the advanced world:

1. Spending on the welfare state in all its form expands;

2. Government spending gets so huge that a crisis is reached;

3. The government is forced, like Greece recently, to cut its spending. Alternatively, people get sufficiently concerned about the crisis to elect a government which will cut the spending, as happened in Sweden;

4. After painful cuts, an excessively high but bearable level of state spending is re-established. Then the country starts again at number 1.

The extraordinary thing about the current situation in Britain is that the national debt is extremely high, and unfunded state pensions and public servant pensions are enormous. Yet most people are not aware of how dangerous our situation is.
Britain needs a sudden access of moral fibre to face up to its problems and act. No, I am not optimistic that this will happen.

Laura Perrins

  • KilowattTyler

    Pensions:

    For every child, as soon as the birth is registered, set up up pension fund of say £25,000. The money to be invested in tracker funds only. Means test the funding, so that 100% of the total can come from the Treasury, but does not in many or even most cases. In the event that the child dies before being able to draw the pension, the proportion of the fund paid for by the parent/guardian to determine the proportion of the accumulated fund to be credited to the child’s estate (so if the parents contributed £10,000 of the £25,000 then 40% of the accumulated fund would be paid into the child’s estate, 60% would go back to the Treasury).

    Tracker funds have very low administration costs. The pensions industry would like you to think that their investment gurus are worth every penny of their enormous salaries but only about 7% of managed funds match or outperform the stock market (and how many of that 7% produce a stockmarket-beating return once the cost of the higher fees are taken into account?). By confining investment to tracker funds it would be possible to avoid shovelling taxpayers’ money into the bank accounts of smooth financial service industry professionals.

    By starting with a lump sum at birth you effectively gain 25+ years of compound interest over existing private pension arrangements. Since the stock market over 60+ years (birth -> retirement age) is likely on past form to comfortably outstrip inflation and produce substantial real returns the strategy I have outlined should produce good pensions at the least possible cost.

    • Carbonari1848

      A pretty reasonable proposal. The initial 25,000 might scare a few people off, but it actually works out cheaper than all the other options.

      A further bonus is that if you have this level of capital in index linked funds that are not going to be messed around with by skittish hedge fund managers and their “genius” technical analysts (tea-leaf reading, anyone?), it might provide a bit of stability to financial markets.

      A further bonus is the obvious benefit of providing substantial, actual, real long term investment of real capital to real companies.

      All in all, a good plan.

      • RobertRetyred

        See my post to Kilowatt: from where does this £25,000 originate?

        That is £25,000,000,000 per year: it’s better than QE!

        • Yes, there is moral hazard in his scheme, there always is. The problem really is that it is none of the government’s business. If you are improvident and retire, you should starve. Tho chose wrong, you get to pay for it. Trouble is that it is nobody’s interest, especially politicians to advocate for self reliance, it is their interest to increase the government.

          St Paul said it best, “He who does not work, neither shall he eat. “

          • KilowattTyler

            Very enlightened!

            Robert Maxwell’s pensioners should be allowed to starve as they chose wrong by deciding to work for the old crook!

            Perhaps when automation eliminates almost half of jobs in the next 20 years, as predicted by many experts, we should let about 30,000,000 million people in the UK starve!

        • Carbonari1848

          From the taxpayer. Kilowatt is arguing that it is cheaper and more efficient for anyone – the taxpayer, the parents, anyone – to put in 25,000 at birth than it is for anyone to try to scrape together a decent retirement fund when they get round to thinking about it at age 45.

          • RobertRetyred

            It is only cheaper if the money invested grew, at least inline with inflation, otherwise it would be more expensive. And from where is the money originating.
            If this could be done, everyone could do it, whether it was in a pension or not, for a lot more than £25,000. In fact we could put in money for people who hadn’t yet been born – and they could avoid going out to work!
            Time is money: that is why we get interest on our savings – or rather, we used to! 🙂

          • KilowattTyler

            See my reply to English Advocate, above, for details of the long-term real (inflation-adjusted) increase in stock-market investment.

            Time is indeed money and is central to my argument. If you have any maths skills you will know the significance of time in anything that involves ‘compound interest’ ( an investment P growing at 5% per year left growing for T years will have a final value of ((1.05P) to the power T) –
            since T is a power, the increase is geometrical) . By investing a lump sum at birth rather than waiting for the kid to start earning and paying into a pension in dribs and drabs you gain a lot of T!

            Yes, a baby might turn out to be a Nobel prize winner, or a drug addict – we have no way of knowing. The present system of course does not penalise drug addicts, layabouts or other ne’er do wells.

        • KilowattTyler

          The current number of births in the UK is around 700,000 per year. A one off payment into a pension fund for each child would be therefore about 700,000 X 25,000 = £17.5 bn per year.

          Ironically, this is about the same amount as the over 65s pay in income tax!
          See link below:

          http://www.thisismoney.co.uk/money/pensions/article-3238687/Pensioners-pay-11-total-UK-income-tax-revenues.html

          More seriously, to put the £17.5 bn in context, in 2015/16 the total receipts for income tax were £170 bn and for National Insurance £114 bn. Total tax receipts were £680 bn.

    • RobertRetyred

      From where would this £25,000 originate? I can’t see parents being able to contribute £10,000, or £20,000 if they have twins, if only because they probably have only one in full-time work, and money from the Treasury is money-tree money! It would be the Government ‘investing’ in ‘winners’, and there would be the temptation to set up ‘investing opportunities’, like Delorian!

      Tracker funds rely on general wealth generation in the private sector, which isn’t guaranteed, though it ought to help the Public Sector become aware of the fact that the future is an unknown and that it can be affected by current government policy.

      Speaking of which, how would you stop any future Gordon Brown raids? Without those, our pension industry would have been much healthier.

      Just banning Public Sector guarantee final salary pensions would fix most of the problems. If a private sector company wishes to do that, they will need to underwrite it.

      I can see that someone on £30k would like £20k (including their state pension) to live on in retirement, but why on earth should someone on £60k need £40k, let alone someone on £150k needing £100k.

      On those salaries, they should have accumulated many money saving assets, like a house, and enough furniture, clothes and cars to last a while. Commuting costs would be zero and surely they should have some savings!

      • gunnerbear

        HMG has moved to CPI – that is starting to have a big impact on the cost of pensions and of course HMG will no doubt get round to increasing the retirement age…. 🙂

      • KilowattTyler

        1/ First paragraph:

        (i) exactly which parents do you have in mind? Are all parents equally wealthy? Are the other circumstances of parents uniform throughout the UK?
        Hint: I used the words ‘means-tested’ in my post.

        (ii) “…money from the Treasury is money-tree money!” Yes, like the money used for education, health, defence…

        (iii) “It would be the government ‘investing’ in winners….like Delorian”
        No it wouldn’t. It would be investing in the whole stock market using tracker funds – these use computers to track performance and guide investment. There would be no opportunity for political wiseacres to fund their pet projects from this source without overt misappropriation.

        2/ Second paragraph:

        If there isn’t wealth creation in the private sector, there isn’t wealth creation, full stop. There might be a short-term time lag for this to become apparent, but this will be because the Government would borrow money, i.e. store up problems for the future.

        3/ Third Paragraph:

        (i) There is no absolute guarantee that any future government will or will not do anything. They could abolish state pensions, reintroduce workhouses, nationalise property without compensation, abolish free speech (for examples). The nearest thing we have to a guarantee of government behaviour is the ballot-box. As suggested elsewhere on this website, we really need Swiss-style direct democracy to put politicians on a shorter leash.

        (ii) To mitigate against the risk of future Gordon Browns and their nasty little ways the fund should be placed outside direct government control (government would put the money in for each child, but the day-to-day running of the fund would not be controlled by a ministry).

        4/ Last two paragraphs:

        If someone wishes to invest to have a big pension, that is their business.

        There would be nothing to stop someone having an additional private pension in the system I propose.

    • English Advocate

      Proactive investment would be commendable if the stock market – and the whole financial system – wasn’t in such a dodgy, parlous state.

    • gunnerbear

      “By starting with a lump sum at birth you effectively gain 25+ years of compound interest over existing private pension arrangements.” I wonder how many people on ZHCs, on the NMW, could afford to contribute a penny (let alone find thousands of pounds for a pensions investment).

      • KilowattTyler

        Read my post more carefully and you will see that I propose a means-tested system in which it is possible that 100% of the lump sum can be paid by the Government. I do not suggest that the poverty-stricken be forced to cough up £25,000.
        Chris Evans, Claudia Winkelman and other BBC nabobs might well be asked for the full £25,000; those cleaning the BBC offices would not.

        • gunnerbear

          How goes the mean testing for tuition fees and living expenses… 🙂

  • Carbonari1848

    You will hear nothing from the feminists about how men contribute far more to pension funds than women, yet receive far less in overall payments during their retirement.

    • RobertRetyred

      And many women receive widows pensions from their late husband.

      • And men could receive it too if the wife chose that option. All rates and options factored in life expectancy of the spouse and their current age. Women are fairly discriminated in pensions.

    • Speaking as an ex employee of a pension provider I can tell you that the annuity rate for women was higher (ie they paid more for their pension) than men. They did not get more per annum for the same pension fund, they received less due to life expectancy.

      I doubt this has changed in the last 15 years.

      • RobertRetyred

        I think you mean lower: they received less, annually, for the same capital sum.
        Don’t most annuities still have the widow/widower option, for not much of a penalty or are there so many singles and those couples, both with a pension?
        I would have thought they would be better off with both having that option though.

      • Carbonari1848

        As revealing what I do for a living would undoubtedly cost me my job, I am constrained in how much information I can offer in my reply.

        You say that you doubt there has been a change in the last 15 years. The pension industry has changed fundamentally in the last 15 years. We have been moving away from the unsustainable system of defined benefit pensions for the whole of that time.

        – You are talking about defined benefit / final salary schemes, where the annuity is based on an assessment of life expectancy.
        – I am talking about defined contribution schemes, where you get back a sum based on what you put in.

        The latter type of fund is now the dominant one, both in terms of contributions and participants. The viability of these funds is based entirely on the contributions made by the members themselves. The investment capital provided to the rest of the economy by the biggest investors in the country – pension funds – is also based on these contributions.

  • SimonToo

    The nature of social housing has changed from affordable housing for the working poor (who paid rent to cover the interest the local authority had to pay to borrow the money to build that housing) to a system of housing for everyone. Affording the latter is a problem, as is justifying it.

  • Alan

    Interesting. I disagree with the idea that the people don’t have moral fibre to face it though. If the politicians had been honest (and that idiot Brown hadn’t destroyed workplace final salary schemes across the private sector), people will take the necessary action. Unfortunately, politicians are craven cowards unwilling to tell it like it is for fear of losing votes, and the media is stuffed with cronies and backslappers who prefer to suck up to the political establishment than to investigate. Hence we are where we are. It can be fixed, probably, but I know that I for one will have to work into my seventies and came to that conclusion a few years ago, so you’re not telling us anything the investigators and thinkers amongst us don’t already know.

  • Jeremy Poynton

    The first anomaly to be rectified is public sector pensions. Folks how can’t afford to save for their own pensions are forced to subsidise those who can easily afford to save for their own pensions. We see public sector workers signing off early with seven figure pension pots. This is, quite simply, theft from the public purse. If we can’t afford pensions, then at least make the playing field equal.

    • English Advocate

      To add insult to injury, the high-flyer boomer characters are often at the forefront of virtue-signalling political correctness. As a specimen of the genre: Helen Ghosh.

      • Jeremy Poynton

        Good Lord yes. Not only do we grossly overpay them, they get to tell is what we can and cannot do and think. Public service? Hmmm

  • Coniston

    ‘We need to find a way of granting more planning permissions for building’. Is this correct? I understand that the big developers are sitting on over half a million building plots with planning permission, but won’t build on them as they make more money building on greenfield sites. If this is so, these building plots should be confiscated, and sold to builders who will start building on them.

    • English Advocate

      Plus raising interest rates would bring house prices down helping to make them more affordable for young people. The main objective of the interest rate policy currently being operated is the propping up of the property sector for the benefit of developers and landlords.

      • gunnerbear

        And keeping homeowning voters sweet thanks to ever increasing house prices.

  • Sargv

    Why should current generation even bother keeping promises made to their grandparents by populists politicians before they were even born? The “national cohesion” argument makes no sense in open-borders “proposition nations” of modern West.

    Default on unfair pensions for the ex-public sector workers IS an option worth considering. They were too naive to vote for populists – and they should pick their slack.