In the latest in Pensions Expert’s series of open letters to the Pensions Commission, Liz Emerson of the Intergenerational Foundation asks the commissioners to consider who is being asked to foot the bill for retirement sector reforms.
Dear Pensions Commission…
The Pensions Commission seeks a pension system that is “truly adequate” and “strong, fair and sustainable”. But for whom? The pensions industry? Unions? Taxpayers? Government? Employers? Employees?
Rarely is there mention of protecting those who will end up footing the bill – younger and future generations.
Successive governments have played a politically toxic game of pass-the-parcel over the triple lock on the state pension. By fawning to their older voter base, politicians have handcuffed the country.
“Until there is a cross-party consensus with a politically neutral focus on intergenerational fairness, the interests of younger and future generations, who do not have seats at the negotiating table, will be sacrificed.”
Liz Emerson, Intergenerational Foundation
Until there is a cross-party consensus with a politically neutral focus on intergenerational fairness, the interests of younger and future generations, who do not have seats at the negotiating table, will be sacrificed.
How to be fair to all generations?
Pension liabilities are claims on future output and incomes. With a shrinking workforce, rising old-age dependency, low growth, global instability and potential workplace shocks from artificial intelligence, our children and grandchildren will likely end up paying more in tax for reduced public services, while retiring later on lower pensions.
How, then, can we deliver independent institutional mechanisms that remove pension policy from today’s toxic politics? Auto-enrolment, while a success, won’t deliver the comfortable retirements many expect based on current contribution rates.
The commission’s priority must be to lay bare the true scale of pension liabilities facing our children and grandchildren – whether funded or unfunded public sector pensions, private pensions, or the state pension. The public needs to know the facts. Challenging the use of high discount rates to obscure the true scale of pension liabilities being passed on to younger and future generations will be crucial.
The commission should also acknowledge that increasing employee auto-enrolment rates will likely exacerbate the cost-of-living crisis facing younger generations. Essential spending takes up 70% of the average weekly expenditure of those aged under-30, according to research by the Intergenerational Foundation.
We urge the commissioners to look beyond contribution rates and lay out the many other financial pressures – such as housing costs, precarious employment, and student debt – that weigh younger generations down.
Radical measures to move towards fairness
The Pensions Commission should consider overall wealth by age, and how best to ensure that its intention to decrease pensioner poverty is funded by those with the broadest shoulders, whatever their age. For example, by aligning the triple lock with Pension Credit, the burden of higher taxation on younger generations could be reduced while decreasing poverty levels among the 11% of pensioners who rely solely on the state pension.
Abolishing higher-rate tax relief to the better-off must also be considered, to be replaced by a 30% flat rate.
We would also argue for closing defined benefit pension schemes and granting an upfront pay increase for affected workers, many of whom are in the public sector.
The commission could also learn from overseas systems such as Australia.
The Australian Age Pension is means-tested based on pensioner incomes and assets. It is also uprated so that pensions rise in line with earnings, while being protected from inflation.
Australia has a compulsory superannuation system, with employers required to contribute 12% of their employees’ earnings to a private superannuation fund of the employee’s choosing.
This system means that spending on the Age Pension is projected to decline as a share of the economy over the coming decades. In contrast, spending on the UK state pension is expected to reach around 8% of GDP by the mid-2070s, up from around 5% today.
The elephant in the room
Most politicians I meet agree that the intergenerational contract is under unprecedented strain. They acknowledge that the state pension devours government spending and prevents spending on other generations. Just this month, the Intergenerational Foundation reported that the gap in per capita spending on an older person versus a child has grown by 170% over the past 20 years.
We can design a renewed intergenerational pensions contract, but that needs political bravery, cross-party buy-in, and intergenerational impact assessments to protect generations to come.
Liz Emerson is the chief executive officer and co-founder of the Intergenerational Foundation.
