Sunday, October 11, 2009

Fumbling The Pension Sums


As you will know, George managed to fumble his sums over raising the state pension age. Which is really rather concerning.

George reckoned bringing forward the planned increase in the State Pension Age (SPA) to 66 would save £13bn pa. But the National Institute (NIESR) - on whose figures George is supposed to have based his proposal - have denied it. They say:
"The National Institute estimated that an increase of 1 year in the effective retirement age would save the government £13bn per year. However, since the participation rate of old workers is well below 100%, this requires an increase in the effective working age of 1 ½ years. This can only be achieved if people choose to work longer, and would require changes in benefits, state retirement ages and a campaign to persuade people that they need to work longer to restore their savings."

So do we all get that?

The key point is that the bulk of the £13bn government "saving" actually comes not from the reduction in the cost of state pension payments itself, but from the increase in tax revenues generated from our higher GDP if people are persuaded to carry on working for longer.

And that £13bn saving is only realised if there is a 1 ½ year increase in what NIESR calls the "effective working age", which is not the same thing as a 1 year increase in the State Pension Age.

Many people withdraw from the labour force before 65 - ie before the existing SPA (Tyler being a case in point). So merely increasing the SPA to 66 is unlikely to increase the effective working age by a full 1 year, let alone the 1 ½ years NIESR assumes. To achieve that, we will need to reinforce the change in SPA with a raft of other measures designed to keep oldies at the grindstone (NIESR doesn't actually mention the use of bayonets, but we get the general idea).

Oh, sure, George's people now claim that they'd understood and taken full account of these complexities all along, but that their figure was higher than NIESR's because they'd added on an inflation adjustment.

To which we say hmm. Hmm and double hmm.

All of which underlines a familiar point: with only six months to go now, George still doesn't appear to have a coherent and robust cuts plan. One that can stand up to people giving the tyres a proper kicking.

Yes, we know he doesn't want to frighten the horses by announcing too much too soon. And yes, we know he doesn't want to commission serious work in case it leaks out.

But surely he ought to be on top of any measures he is prepared to announce. Fumbles like this are not only embarrassing, but just eight months away from him delivering a make-or-break budget, they are also quite scary.

Must do better.

If there's one thing we most certainly cannot afford, it's to lurch from one bunch of fiscal incompetents to another.

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