It is time to cut pensions

It is widely recognised that the state pension is not sustainable. By 2050, with the triple lock, spending on the state pension will rise by 25 per cent, social care spending by 54 per cent, and pensioner benefits by 71 per cent. This total increase is equivalent to £62bn in today’s money. 

When the projected increase in healthcare spending of £88bn annually is added, again largely driven by older people, the total increase comes to £150bn, or 5.9 per cent of 2050’s GDP. Looking further ahead to 2066 and we find the national debt forecast to be over 230% of GDP due to all this. 

We’re facing a fiscal abyss built up by older generations who can’t apparently be told “no” politically. As Paul Johnson said recently, “It can’t go on, so it won’t”. What should be done about it?

Fiscally speaking, we can only raise taxes, cut spending, or borrow. Borrowing is not possible as bond markets will never finance a deficit which is projected to be 20 per cent of GDP by the early 2070s. Raising taxes is said to not be possible either due to us already being at the taxable limit. This is doubtful as higher consumption taxes and poll taxes on people could easily generate a lot of revenue. Regardless, the important question is not so much what is possible, though this bounds the latter question, but what distributive justice demands. Let us explore the central argument pensioners give for why spending must not be cut, or, basically, why taxes on workers must increase.

Pensioners argue that since they’ve contributed all of their lives, they deserve that money back out. This contribution argument is hardly applied at all when poor pensioners seek redistribution from the top 1 per cent of earners who pay 29 per cent of income tax. Plus, it falsely assumes we each have a state pension pot we’ve built up. But let us set both issues aside. The contribution argument simply doesn’t get pensioners to the conclusion they want because the average baby boomer has taken £1.20 out of the welfare state for every £1 they have paid in. Their argument would require cutting spending on them by a sixth. This would seriously help solve the fiscal problem. However, is the contribution argument itself distributively just? No. 

Imagine a plague which kills 50 per cent of workers leaving today’s 13m state pensioners to claim taxes just from those remaining. Absolute tax take for the elderly on working people would need to double to carry on returning the pensioners’ contributions. The young would have to be put under crushing levels of taxation. This is unjust. I intuit it would be unjust even if the workers could meet their basic needs. Pensioners should bear at least part of the disadvantage of a reduced working population. The contribution argument alone cannot be true then, because the young are entitled to the fruits of their labour, at least to a large extent. 

Returning to reality, today we face a similar problem of less severity due to our declining demographics. Britain’s fertility rate today is 1.41 per woman, a dramatic reduction on 1972, the last year in which the fertility rate met the 2.1 replacement rate. The result is that while in the 1970s there was one pensioner for every four workers, today it is one to three, and, by 2050, it will be almost one to two. 

Absent a lot of economic growth, declining fertility rates means each generation paying £1 in to get £1 out, per the contribution argument, will increasingly clash with respecting young people’s right to their own money. Some will say it is simply up to democracy to decide the balance between the two claims. Maybe democracy is the right political decision procedure to use, but, surely, its answers are not necessarily just. Again, this would imply there would be nothing wrong with pensioners imposing a massive poll tax on the young people who survived the plague if they got a majority. No. Clearly, in a declining worker population pensioners should get less out of the welfare state than they have paid in.

Whatever answer people come to, besides increasing economic growth, some group is going to get very angry. Hard choices will have to be made. To avoid them, our cowardly politicians may pull the most dangerous lever they have left: money printing. In the long term, this would start a massive business cycle via artificially reducing the interest rate creating a huge glut of malinvestments which could not be sustained without real savings. This would spell disaster as Steve Baker and Max Rangeley outline in their recent paper on the subject. 

The current level of old age spending in this country is unjust and it will only get worse into the future. If people should get out of the state pension what they paid in for it, then, the state pension should be slashed by a sixth, and certainly not triple locked. 

Yet this contribution argument for the state pension is itself questionable as it implies there is no upper limit to the seizures pensioners can make on workers. No. Individuals have a right to the sweat of their brow. We should resist the grasping hands of a state desperate to satisfy its increasingly elderly electorate.