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Editorial
A
number of previously unpublished pieces have recently come
to light. In this issue we publish Christopher Downs's paper
on pensions, written four years ago but as relevant now
as then, and perhaps more so, as the current debate on pensions
takes a new turn now that companies close final salary pension
schemes.
Also
in this issue is the usual mixture of news and reviews;
and a 'Contribution to debate' by Anthony Sperryn on 'citizenship',
a subject which we shall pursue at greater length in our
next issue.
This
is the first of our web-based newsletters, accessible from
the website as well as via an email link. For anyone who
still needs a hard copy there is one available on request.
Main
article
Pay
As You Go funding for pensions: panacea or pariah?
By Christopher J Downs, Open University
"If
Crusoe were alone, he would obviously die at the beginning
of his retirement." (Paul Samuelson, 1958, p.468).
Daniel
Defoe's Robinson Crusoe is of course the world's most famous
ship-wreck victim. The reason for this dire prognosis for
his old age is that Samuelson assumed it was not possible
to preserve consumption goods, to save them for future consumption
- consumption goods cannot be transported through time because
they are perishable. This assumption is still generally
valid. Samuelson's 1958 paper provoked a concurring reply
from his fellow economist Abba Lerner, in which Lerner stated:
"...the
fable of the time-travel of consumption is accepted with
implicit faith by the accountants, as guardians of the private
point of view of savers who are putting money aside for
their old age. It is the duty of economists, as guardians
of the social point of view, to explode this fairy tale."
(Abba Lerner, 1959, p.517).
The
task of this paper is to explode the myth that somehow the
'burden' of an ageing population is heavier if the attempt
is made to support it by a pay-as-you-go pension scheme,
and that this ageing will inevitably render such PAYG schemes
unsustainable and condemn any such attempt to failure.
Why
is it important to dispel this myth? Well, let us be clear
at the outset. A citizen's pension (CP) - a flat rate pension
payable to all citizens unconditionally - would, de facto,
be financed on a PAYG basis. In the present climate, that
is almost certain to be seen as an obstacle to its adoption.
In
its green paper Partnership in Pensions, the UK government
has stressed that "Those who can save for retirement
have a responsibility to do so" (DSS, 1998, chapter
9). There is no mention in the document of the responsibility
on which a citizen's pension would be based; that is the
responsibility of those who can afford it to bear an appropriate
share of the tax burden required to finance a decent level
of pension income for all pensioners. The green paper explicitly
states that it is an objective of the government to reduce
the proportion of the pensioner population's income that
is provided via the state, and increase the proportion provided
through the private sector. The basic state pension is to
continue to be indexed only to prices rather than average
earnings. SERPS is to be replaced by a flat rate State Second
Pension and still more people will be encouraged to opt
out of this and take up a private pre-funded pension instead.
A new pension product is to be introduced to achieve this
- the Stakeholder Pension. Additionally, and quite inexplicably,
the green paper offers the claim that "state pensions
cannot be supplemented with voluntary provision" as
a justification for reducing the role of state pensions.
In fact, people in the UK have been using private pensions
to supplement their state pension entitlement for decades.
The bias against PAYG would appear to be clear and the government
seems to subscribe to the same fable as Lerner believed
accountants did.
If
a citizen's pension is to be taken seriously as a policy
option, PAYG must be rehabilitated. The present paper seeks
to address the myth of the burden of PAYG pensions but also
seeks to widen the debate. For once it is accepted that
the 'burden' of an elderly population of given size is the
same, whether that population's income is provided on a
PAYG or pre-funded basis, then there are other issues which
may lead us to prefer one financing method over the other.
Thus, the argument that PAYG financing is not the pariah
it is sometimes made to seem is developed along three dimensions:
·
Economic considerations
·
Risk-handling capabilities
·
Equity.
In
section A Samuelson's Robinson Crusoe example is adapted
to dispel the instinctive mistrust of the PAYG concept.
It is pointed out that the current method of raising the
funds for the UK's state PAYG pension system is inefficient
but that this should not be taken as an argument for scrapping
the PAYG scheme. There are superior potential alternative
taxes which should be used to finance state pensions. Additionally,
the widely held view that PAYG pensions depress the level
of private savings in the economy with detrimental effects
on economic performance is based on a rather one-sided view
of the economic arguments. There are persuasive counter-arguments
and there is no strong empirical evidence to support claims
that PAYG is damaging to the health of an economy.
In
section B it is argued that PAYG has the advantage over
private pre-funded pensions in dealing with certain risks,
including inflation risk and risks such as unemployment.
Fear of the frequently cited threat to PAYG schemes, political
risk, is discussed and shown to be based on a self-fulfilling
circular argument.
Section C considers two equity issues. First, it is taken
as fact that some redistribution towards the less well off
in retirement is desired. In this case a PAYG system is
not only desirable but essential. Secondly, it is argued
that the issue of what is termed inter-generational equity,
which has been presented as a threat to PAYG systems, is
of little practical relevance.
The
economics of PAYG
Much
popular debate about pensions appears to start from the
position that pay-as-you-go financing of pensions is at
best unsustainable and at worst fraudulent. An ageing population
will render PAYG schemes insolvent (whatever that might
mean) and to reinforce the point, attention is focused on
alleged damaging macroeconomic effects. In the UK, as elsewhere,
state PAYG pension payments constitute a part of public
expenditure, and since the 1970s concern about the macroeconomic
impact of public spending has turned into virtual hostility.
The tide may be turning, with the election of a Labour government
in 1997, but concern about public expenditure, and especially
welfare spending, remains strong, as evidenced by the Chancellor's
initial commitment to the previous administration's spending
plans. In any event, for those waverers who might like the
idea of a state pension, there is always the fear of spiralling
taxes and the consequent cost to themselves. The overall
result is that in TV documentaries we observe doleful members
of the public opining along the lines of: "well, I'd
like to rely on the state, but I just don't feel I can any
more." (For example, see the Panorama documentary 'From
the Cradle to the Grave,' 1998.)
More
sophisticated debate bemoans the level of payroll taxes
that will be required to finance PAYG pensions for a future
larger retired population, and the effect of the private
saving displaced by a PAYG scheme. The concern though is
the same: the impact on inflation, unemployment and growth,
the three key data items on which most popular judgements
about the performance of the macroeconomy are based.
Before
discussing the more sophisticated arguments, let us revisit
a much earlier debate so that the popular 'bar-room' argument
against PAYG can be put aside.
This
instinctive scepticism about PAYG schemes is not new and
nor is it a peculiarly British phenomenon. Abba Lerner,
a prominent American economist, writing in 1959, noted that
there was a "belief that a social security program
cannot operate honestly unless it has acquired a fund actuarially
corresponding to the savings of all those members who have
paid in their contributions in the past and who will be
taking them out as benefits in the future." He went
on to say emphatically:
"...the
fact is that such a fund is completely unnecessary. It is
called for only because accountants look on the social security
program as old age insurance provided by an enterprise that
must accumulate assets to match its contingent liabilities.
Such accounting practices are completely justified for a
private insurance company, which must be prepared for the
eventuality of failing to enrol any new customers and still
having to pay the covenanted benefits to its old customers.
But from the social point of view, the pensions of the old
can only come out of the current output of consumption goods.
The pensions may therefore be paid out of current contributions,
and the only fund necessary is a reserve to cover expected
temporary excesses of outlays in pensions over collections
in contributions." (Lerner, 1959, p.516, emphasis added.)
Hence,
Lerner's memorable point about the role of economists, quoted
at the head of this paper. And nothing has changed. The
time-travel of consumption remains a fable, despite technological
developments, such as irradiation, allowing the longer storage
of foodstuffs. Economists remain concerned with the stewardship
of society's productive resources and the distribution of
its output. So the OECD was able to publish a report in
1992 in which it was restated that:
"Only reducing the consumption of the aged... reduces
their cost to society. The means of financing, advance funding
or pay-as-you-go, does not change these costs" (Duskin,
1992).
Since
time-travel of consumption goods is impossible, if Crusoe
is not to starve in his retirement, he must find someone
else (either younger or willing to retire later in life)
to produce the things he needs to stay alive. The assumption
then is that some deal must be struck. Crusoe must offer
the younger islander something in return for his sustenance
in retirement. What can Crusoe offer? He can only offer
some of his own output while working. His younger compatriot
will thus enjoy a more extravagant lifestyle during the
earlier part of his life but will then have to support Crusoe
and simultaneously seek urgently to find, and strike a similar
deal with, a third younger individual. If the need to strike
such deals could be avoided, by somehow binding in the unborn
generation to a PAYG system, then Crusoe and his successors
would all be better off, since none would have to pay the
succeeding generation in advance of receiving support in
old age. This is the essential insight of Samuelson's 1958
paper and is what John Hills of the London School of Economics
has likened to passing boxes of chocolates along a line
of people (Hills, 1992).
If
everyone in the line passes their box of chocolates to the
person on the left, then the person on the extreme left
ends up with two boxes and the person on the right ends
up with none - unless every person born joins the end of
the line at the right with their box of chocolates. In the
Crusoe case, it would be Crusoe who ended with two boxes
of chocolates. Hills suggested that in the UK it was the
generation who had to fight the second world war who benefited
in this way from the establishment of the UK's 1948 welfare
state, and so it could be argued that they were deserving
of this good fortune. Once the 'game' is in progress, then
no one loses out unless someone refuses to join the line
and hand over their box of chocolates. As long as the 'social
compact', to use Samuelson's phrase, is adhered to, all
is well. In fact all is better than well, because Samuelson
showed that all are better off than they would be in the
non-cooperative situation wherein we rely on market transactions
- having to make deals.
Hills
was seeking to characterise a welfare system in its entirety
and was not exclusively concerned with pensions. In fact,
the analogy would be a more accurate representation of a
PAYG pension scheme if we imagined that the individuals
in the line pass on not the whole box of chocolates to the
person on their immediate left, but rather that they pass
a percentage of the chocolates their boxes contain to individuals
placed beyond a certain point along the line to the left.
This is a point that becomes important in the later argument
in section B.
The
discussion of Crusoe hints that our analysis so far is based
on a rather simple economy. It has been presented, not to
justify PAYG pensions in all circumstances, but to illustrate
that there is nothing inherently wrong with financing pensions
on a PAYG basis - to try to overcome the instinctive objection
that some people seem to have to PAYG. If we have succeeded
in this, then we can now proceed to consider the more subtle
arguments.
Samuelson's
seminal overlapping generations model allowed for no investment
goods. There was no capital equipment! As soon as this assumption
is relaxed, it becomes possible to see that another alternative
is open to Crusoe. Upon retirement, he could have offered
his successor worker his capital equipment, his fishing
rods etc, in return for payment in terms of consumables
during his retirement. However, Crusoe would have had to
forego consumption during his working life in order to devote
time and effort to the production of those capital goods.
This is no different to foregoing consumption in order to
pay his younger comrade in fish etc, as in the earlier case.
An important difference emerges, though, if the capital
equipment Crusoe produced enhances his and his successor's
productivity, as would be expected. This is where much serious
debate about PAYG scheme focuses: does PAYG funding 'crowd
out' productive investment? For if Crusoe could establish
a 'chocolate box line', à la Hills, then he need
not make the investment in capital goods that will become
his meal ticket in retirement. We take up this issue below.
In
the primitive island economy inhabited by Crusoe, there
was no consideration needed either of the effect of the
taxes required to effect a transfer of spending power between
two groups. The island was a barter economy. Taxes alter
the pattern of relative prices in an economy. For instance,
and most pertinently, income taxes raise the price of labour
to employers and reduce the price of leisure (not working)
for workers. Income taxes may therefore be expected to reduce
the amount of work done .
It
is worth pausing for a moment to clarify our terminology
here. Earlier, in the quote from Duskin (1992), there was
a reference to the cost of the aged to society. Duskin is
talking about the cost in terms of the size of the total
sum expended in pensions paid to the aged. Although that
is a cost to the working population, since there is an opportunity
cost associated with handing over their money (they cannot
spend it on other things), it is not a cost in the usual
accounting sense of using up some resources in order to
produce some desired output. In this case, the desired output
is the accomplishment of a transfer of spending power from
one group to another. The cost of such 'output' comprises
the labour and other resources required to achieve this.
Moreover, it is not hard to see why a PAYG state scheme
might compare rather favourably with pre-funded private
pensions in terms of this cost. There are economies of scale
in administering pension schemes, and there are no costs
involved in persuading citizens to sign up to become beneficiaries
of a state scheme . Private schemes are smaller and incur
large marketing costs. (It is acknowledged that in any such
comparison, the costs borne by employers in complying with
the requirements of a state scheme should not be overlooked.)
The
costs with which we are now concerned are different again.
These are what economists would more formally call 'deadweight
losses'. Such losses constitute desirable output that would
have been produced in the absence of the transfer of resources
(in this case from workers to the retired) but which is
not now produced and for which no other output is produced
to compensate. Productive investment is not undertaken because
of crowding out, and labour is not applied to produce useful
output because of taxes on labour; and nothing else is done
with those resources that now lie idle.
These
deadweight losses are what Arthur Okun had in mind when
he talked of a 'leaky bucket' being used to carry resources
from the better off to the less well-off. The theoretical
possibility of such leaks is well established but their
empirical reality and magnitude are not. Yet the question
we need to answer is: how large a loss due to the leaky
bucket should be tolerated before the attempt at redistribution
should be abandoned? There is a cost-benefit analysis to
be carried out here, which this paper does not attempt.
However, further comment can be offered.
Certainly
the attempt should not be abandoned or limited unless every
precaution has been taken to ensure that the leak is minimised.
If the case for a citizen's pension as a benefit is accepted,
then the optimal means of financing should be sought. The
current means of financing the UK's PAYG state pension payments,
through 'contributions' from employers and employees which
amount to a tax on employment and a tax on income from work,
cannot be argued to be optimal in this sense. James Meade,
Nobel Laureate in economics, has described it as the "height
of folly" (Meade, 1995, p.52). In the twenty-first
century, it may well be felt that an appropriate way of
financing a citizen's pension would be, at least in part,
through 'eco-taxes', e.g. taxes on CO2 emissions, and this
is a proposal now receiving some attention in academic circles.
Whereas the contributory principle is not only used to exclude
some people from benefit, but also constitutes a tax on
work, taxing pollution creates a disincentive to something
that most people believe should be discouraged anyway.
When
a relatively simple solution such as this appears to be
possible, it is perhaps not necessary to measure the 'leak'
arising from the current folly all that accurately. We should,
as a matter of urgency, move towards a better tax base.
There is no such simple solution to the problem of crowding
out and so it is important to assess as accurately as possible
the extent of this phenomenon. Unfortunately that is not
easy to do. There are a number of reasons why it is difficult
to establish unambiguous theoretical predictions of the
effect of PAYG pensions on saving and investment.
One
of the justifications that has long been offered for state
pension provision is myopia. Individuals are short-sighted
and, left to their own devices, will make too little provision
for their retirement. If that is true then it cannot be
argued that the state scheme is crowding out private saving.
The fact that many politicians and others involved in the
policy debate over pensions in the UK and elsewhere advocate,
or have introduced, compulsory purchase of private pension
products for their workers suggests that there is a widespread
acceptance of the notion of myopia.
It
might still be argued that the economy would benefit from
greater investment and so some policy to increase saving
is warranted. However, this really has nothing to do with
PAYG pensions; the policy need not take the form of additional
pension-specific saving; and, in any event, in a world of
mobile capital there would appear to be little reason to
suppose that investment is constrained by low domestic saving.
Too little investment is likely to reflect lack of demand
for investment funds, rather than shortage of supply.
A
further complication arises from the acknowledgement that
ending state pension provision without retaining some vestige
of state assistance for the poor elderly is not a plausible
option. The UK government remains committed to state involvement
in pension provision. Whilst some means-tested assistance
is made available, some people will inevitably face the
prospect that additional private saving will simply disqualify
them from receipt of state assistance. Thus a savings trap
will induce some to save less, a concern which recurs in
Pensions in Partnership. Unfortunately, while the government
has emphasised the problem, it has only been able to claim
that the problem will be reduced and voluntary savings penalised
less as a result of its planned pensions reforms (DSS, 1998,
chapter 9). Furthermore, any proposal involving the payment
of compulsory pension contributions by the state on behalf
of individuals unable to pay for themselves would similarly
create poverty traps - if such individuals were able to
find an opportunity to increase their income legitimately,
they might not find it worth while to take up the opportunity
because they would disqualify themselves from state assistance
with their pension contributions. This was a basic flaw
in Frank Field's proposals as set out in Field (1995) and
would appear to afflict the green paper proposals also .
So
there is no convincing theoretical argument that crowding
out will be significant and the issue becomes an empirical
one. Empirical studies attempting to test the hypothesis
that state PAYG pensions have a deleterious effect on economic
performance are frustrated by the fact that it is difficult
to isolate their impact from the effect of other state transfers
(to the unemployed, for example). Therefore, many studies
instead address the issue of the effect of state welfare
in the aggregate on economic performance, measured at a
high level of aggregation, e.g., growth of GDP per head.
Atkinson (1995) assessed nine studies all broadly concerned
with this issue, though differing in detail, and found that
in two of these no significant impact was detected, in four
a negative effect was reported, and in three studies evidence
was found of a positive influence of welfare spending on
economic performance. A further recent study adopted a fairly
simple econometric method to investigate the same question
and found evidence of a weak negative link between state
pension spending and growth of GDP per capita for the 1970s
and 1980s, but not for the 1960s (Caritte & Williamson,
1995).
Atkinson
criticised the empirical research he reviewed on the ground
that it takes insufficient account of the "fine structure"
of the welfare system. Many state benefits have complex
rules governing their disbursement, and these rules influence
the incentives and disincentives created by the benefits.
For example, the operation of means-tested support for the
elderly just mentioned might or might not take into account
housing wealth. Econometric analyses that do not allow for
such complication can only ever pronounce on whether welfare
should be curtailed or scrapped. They cannot provide us
with any help in designing reform of welfare systems.
Thus
we can draw two conclusions so far.
·
The current means of financing state transfers in the UK,
and particularly state pensions is not optimal in the sense
of minimising the 'leaks from the bucket', the deadweight
losses.
·
There is in fact rather little theoretical or empirical
justification for such strong statements as have been made
by some authors, such as Poortvliet & Laine (1994) who
allege that social security programmes are contributing
to sluggish economic growth and decreasing productivity;
and there is no compelling reason to suppose that a switch
from PAYG financing to advance funding would yield additional
benefits that cannot be attained by adopting a more sensible
tax base for the purpose of financing state PAYG pensions.
It
is worth pursuing the economics of ageing and pensions a
little further. Much attention tends to be focused on the
so-called dependency ratio effect of ageing whereby "total
output per worker has to be shared with a larger number
of pensioners, leading to lower PAYG benefits [per pensioner]"
(Meijdam & Verbon, 1997). Yet there is also a second
and off-setting effect whereby, when the population is ageing,
less saving is necessary to maintain the capital-labour
ratio, and so the share of consumption in GDP can actually
be increased; and some of this additional consumption can
be allocated to the retired population through higher pension
benefits per pensioner. Partly for this reason Cutler et
al concluded in 1990 that the optimal policy response to
population ageing in the US was "almost certainly a
reduction rather than an increase in the national saving
rate." While this may not hold for other countries,
or even for the US at a different time in different circumstances,
the finding is a clear demonstration that economic analysis
does not lend unequivocal support to the popular idea that
ageing requires more saving.
Meanwhile,
population ageing itself may be expected to have economic
consequences, independently of any feedback via the pension
system. Cutler et al make another interesting observation:
"any effects of demography on technical change are
likely to dwarf its other consequences" (Cutler et
al, 1990, p.55). Although Robert Solow (1957) found that
technical progress was far more significant a contributor
to economic growth than mere capital accumulation (the raising
of the capital labour ratio, making labour more productive),
much economic analysis continues to treat technology as
a 'black box'. The consequences for the rate of technological
progress of an ageing workforce are thus open to much speculation,
even though many economists would agree with Cutler et al
that the consequences will be highly important. It is important
to keep the debate over pensions funding in perspective.
Risk
Atkinson's
arguments about the 'fine structure' of welfare systems
centre on their effect on incentives. Incentives are partly
determined by the effect of risks faced by individuals.
It is to the issue of risk that we now turn, since the way
in which pensions are financed has an important impact on
their characteristics as a means of dealing with risk.
There
is an important risk immediately apparent in connection
with pensions. The duration of retirement may be longer
than anticipated and so individuals may find themselves
with inadequate consumption possibilities in retirement
- they may run out of money because they live longer than
they expected.
Another
class of risks affecting individuals' retirement provision
comprises those impediments to accumulating sufficient pension
rights such as, inter alia, periods of unemployment, illness,
or caring, which interrupt work and reduce lifetime earnings.
This prevents the individual accumulating the amount of
pension entitlement they would have wanted prior to their
retirement, and can affect both private pension arrangements
and state pensions (if these are contributions-based).
There
is much discussion of whether private insurance can successfully
deal with these risks. Annuities insure against living 'too
long' (longevity risk) and permanent health insurance is
available to cover the risk of loss of income due to incapacity.
However, private provision for unemployment risk is not
well-developed and is arguably problematical. Caring responsibilities
which remove people from the labour force altogether present
a very different challenge. A useful overview is provided
by the Association of British Insurers (1995). Burchardt
and Hills (1997) focus on three case studies (which include
the risk of loss of income due to unemployment and illness,
but not pensions themselves) and demonstrate that for these,
social security appears to offer a better solution than
private insurance.
The
purpose of pensions is to allow people to carry forward
consumption possibilities, even though the time travel of
physical consumption goods is, by and large, impossible.
Their purpose is to solve Crusoe's problem as described
at the beginning of this paper. In the Samuelson-Lerner
exchange, both were concerned to ensure that people are
able to satisfy their preferences for consumption at different
points in time. Samuelson (1958) points out that a form
of social compact is needed to achieve this and that the
use of money is just such a social compact. All agree to
accept money in payment for goods. This means that another
risk becomes of considerable importance - inflation.
In
1998 the view of the National Pensioners Convention was
that "Any pension scheme worthy of the name should
provide pensions of broadly predictable value" (NPC,
1998, p.12), and there is no reason to believe that its
view has changed since then. What matters of course is the
real value of the pension, and inflation makes the future
real value of a pension uncertain. Only if the level of
real returns on investments is independent of the rate of
inflation can inflation be ignored. Whilst some assets are
better hedges against inflation than others, there are times
when people saving for retirement will wish to hold a substantial
portion of their pension savings in cash, e.g. as they approach
retirement. They are then vulnerable to inflation. Once
retired, exposure to this risk is arguably even greater.
Few private pension schemes offer full inflation-proofing
of the annuity in payment once an individual has retired.
Workers in the UK who retired in the early 1970s soon saw
the purchasing power of their private pensions eroded by
the inflation that followed in the rest of that decade.
In
relation to this risk, a PAYG pension scheme has a clear
advantage over money as a social compact. PAYG pensions
can be indexed in line with inflation (or any other chosen
measure, such as average earnings) and as long as the tax
system is such that revenue in cash terms rises in line
with inflation, this presents no economic difficulty . Thus
PAYG pensions can be viewed as a means of dealing with a
flaw inherent in money - its inability to perform reliably
its function as a store of value.
In this connection Samuelson noted that "Even after
extreme inflations, social security programmes can re-create
themselves anew astride the community's indestructible real
tax base." (Samuelson, 1958, p.482) Whilst the notion
of an indestructible tax base is meaningful - the tax base
is in a sense the total formally marketed output produced
by an economy - we should acknowledge that this tax base
must be treated with consideration. The reader is reminded
of the earlier argument about incentives and the fact that
taxes can lead to reduced output. The difficulties encountered
a few years ago by the Russian government in collecting
sufficient taxes to cover its expenditure is also a salient
example, but serves really to reinforce the point made earlier
that the current system of financing state pensions in the
UK by a payroll tax is folly indeed.
What
this amounts to is that PAYG allows society to choose how
it wishes to allocate real consumption among workers and
pensioners, without the flawed mediator of money to generate
interference. Thinking about it in this way casts a new
light on the risk to which PAYG schemes are often alleged
to be uniquely vulnerable. This is political risk - the
risk that the state will not honour its pension promises.
Now it is clear that what critics of PAYG must be saying
is either that the government is corrupt, or that a coalition
of non-retired voters is liable to vote down pension expenditures
and divert the money either into projects of more direct
benefit to themselves or into tax cuts. It is not the case
that the state will be prevented from honouring pension
promises by insuperable economic constraints.
This
concern about political risk was what Samuelson was talking
about when he noted that socially optimal behaviour may
not be self-enforcing: "if all but one obey, the one
may gain selfish advantage by disobeying - which is where
the sheriff comes in: we politically invoke force on ourselves,
attempting to make an unstable equilibrium a stable one"
(Samuelson, 1958, p480, emphasis in original). The risk
is that this political attempt to provide just pensions
through the mechanism of the state may fail.
But
why should the political system be unable to maintain order
and deal effectively with the 'free rider' problem? Are
people so short-sighted and hedonistic that they genuinely
do not wish to continue the 'chocolate box line' in order
that they benefit in their retirement, but would rather
have more chocolates - the whole box - now, in the short
run? It is not clear that the evidence supports this. People
are well aware, in any event, that they will need to make
some provision for their retirement - they cannot sensibly
immediately eat the extra chocolates that they have refused
to pass to current pensioners.
A
more likely explanation is as follows. The political risk
is that voters will be frightened into thinking that political
risk threatens their own pension and so rationally seek
to opt out first, before their state pension withers away
to nothing while they have borne the cost of more generous
pensions paid to earlier retirees. The existence of the
free rider problem creates a form of 'prisoner's dilemma'.
The classic prisoner's dilemma consists of two agents with
two options. If the agents cooperate, this provides a superior
outcome to non-cooperation. But there is an incentive for
both agents to renege on an agreement. In this context the
agents will be generations (or cohorts) and the options
will be to vote for a PAYG state pension scheme or to vote
against it. We must also introduce the concept of time,
so that voting is repeated. Consider generations A, the
elder generation, and B, the younger. If both vote for,
then this produces the best outcome for both (as demonstrated
by Samuelson). But if the younger generation expects the
generation following it, generation C, to vote against,
then B must vote against . It is a well known result in
game theory that if it is expected that the other player
will welch on an agreement in the future, then it is rational
to cheat first - to get your retaliation in early. The other
player will realise this, and so ultimately no agreement
is possible. So, in fact, if generation A suspects that
C will vote against and knows that B suspects the same thing,
then it becomes rational for A to vote against. One of the
arguments against PAYG pensions turns out to be circular.
Perceived political risk makes PAYG pensions undesirable
and so threatens their future; but political risk arises
because the PAYG system is under threat. The problem is
that the superior cooperative solution lacks credibility
and this lack of credibility creates the incentive to cheat
(to vote against PAYG state pensions).
The
reason for this lack of credibility would seem to be the
argument that PAYG pensions are unsustainable in the face
of future population ageing. Yet the economics of PAYG pensions
does not support this proposition. Unfortunately, bad or,
at best, selective economic arguments can be just as powerful
as sound economics, and if it is more easily popularised
then more so. Other contributors to the pensions debate
take economic 'realities' as the basis for their own argument.
For example, David Shapiro's otherwise impressive paper,
providing a political philosophical analysis of social insurance
based pensions, accepts the possibility of crowding out
as empirical fact (Shapiro, 1997). No wonder PAYG is regarded
as a pariah.
It
would be the nightmare of any well educated economist that
fallacious or doubtful economic argument should be used
as the justification for abandoning a desirable social compact
(PAYG) in favour of reliance on a flawed one (money for
pre-funding). Yet this appears to be the danger. It is high
time that economists paid heed to Abba Lerner and exploded
some fairy tales again. In the meantime, let us proceed
to the third strand of this paper's argument.
Equity
The
demise of overtly 'Keynesian' economic policy and the rise
of the New Right, with its calls for greater self-reliance
and less state welfare, more competition and less state
intervention, has led to an increased emphasis on the individual
and a scepticism toward any actions by the state which would
alter the market-determined distribution of resources. Lawrence
Mead has argued that the debate about today's social problems
is not a debate about social justice. Conditions in society
are more in dispute than society's values. According to
Mead, the debate is moral - why do some people commit crime
and not work unquestioningly within the current social order?
(Mead 1997, p.226). In this author's view, this will have
to be changed if a citizen's pension is to become a serious
contender. However, it is not an objective of this paper
to contribute directly to changing this situation. Rather,
it is an assumption in what follows that, if there were
a debate about social justice, then there would emerge a
consensus in favour of rather more substantial redistribution
than is allowed for under a minimalist system of means-tested
welfare.
The
justification for making this assumption is that Crusoe's
predicament makes it abundantly clear that in fact we are
all inter-dependent, and that there may be situations where
collective action is better than relying on transactions
made as individuals in the market. The public view characterised
by the Panorama interviewee mentioned above would appear
to reflect this tension. Some acknowledgement of our interdependence
and our individual vulnerability in the face of the market
seems to lead people to wish to see some notion of social
justice assured; or, at least, there is a genuine sense
of loss at the passing of the aspirations of the Beveridge
welfare state. On the other hand, economic reality, as presented
in the media and popular debate, appears to preclude the
possibility of anything more than minimalist poverty alleviation.
Evidence
from the annual British Social Attitudes Survey would tend
to support the idea that despite the lack of public debate
there is some latent support for redistribution. Brook et
al (1996) conclude from their analysis of responses in the
thirteenth survey that:
"There is no evidence either that richer people are
less in sympathy than poorer ones with increases in public
spending [on health, education and 'universal welfare benefits']
even if they are asked to pay a higher share of the tax
burden to finance them. Indeed, supposedly against their
interests, they appear to be more inclined to favour increases
in expenditure when financed through progressive rather
than regressive tax instruments."
Arguments
for more substantial redistribution have a long history.
John Rawls' 'maximin' principle will be one of the most
familiar. In this context, Rawls requires people to imagine
themselves to be in the 'original position', before any
economic activity takes place and not knowing whether they
will subsequently be successful in the market economy and
acquire sufficient resources to ensure a comfortable retirement.
Private insurance policies could be purchased to cover the
risks that might prevent the individual from achieving this,
but in reality insurance is not purchased in the original
position. It is purchased only once the 'veil of ignorance'
has been at least partially lifted and people have begun
to operate in the markets and have discovered something
about their life chances. This is why insurance companies
charge different rates to different buyers - they are able
to identify different risks and charge more to insure those
in high risk occupations against illness or injury, for
example. Insurance is not a substitute for state intervention
in line with the maximin principle, which states that things
should be ordered to maximise the welfare of the least well
off. Insurance companies are in the business of minimising
redistribution by increasing the accuracy of their pricing,
subject to the constraint of the cost involved in doing
so. Only the state can systematically redistribute resources
in line with society's wishes.
The
contention of this paper is that, if society's view of social
justice requires some redistribution beyond minimalist poverty
alleviation, then a universal benefit, such as CP in the
case of redistribution in favour of the elderly poor, financed
on a PAYG basis, is the best way to achieve that redistribution.
The
tax system is no longer to be used explicitly to redistribute
from rich to poor, in part at least, because of the effects
of such attempts on incentives. In the limit, as suggested
earlier, the abuse of the tax base may actually reduce tax
revenues. This argument is famously associated with Arthur
Laffer and his eponymous curve , reportedly introduced to
government by being sketched on a paper napkin for a White
House Chief of Staff in 1974. (Davidson & Davidson,
1996, p.84.)
However,
taxes have not contributed much to income redistribution
in the UK anyway. The benefits system has long been far
more significant, as shown by the Office for National Statistics'
analysis of 'The Effects of Taxes and Benefits on Household
Income' (Harris, 1977 and Stuttard, 1998). This analysis
makes use of the Gini coefficient, a measure of inequality
using a scale of 0 to 100. A higher value of the coefficient
indicates a greater degree of inequality, and by examining
the Gini coefficient for different measures of income the
impact of taxes and benefits can be isolated. Thus the Gini
coefficient for what is termed original income (household
income before any benefits or taxes) was 43 in 1977 and
54 in 1993/4, indicating increasing inequality. Gross income
is calculated by adding to original income all cash benefits
received. The Gini coefficient for this measure of income
was 29 in 1977 and 37 in 1993/4. The fact that these values
are so significantly lower shows that the distribution of
household income after the payment of cash benefits was
considerably less unequal than prior to those payments.
Deducting direct taxes from gross income produces what is
known as disposable income, and Gini coefficients are published
for this measure of income also. The comparable figures
for 1977 and 1993/4 were respectively 27 and 34, revealing
a rather modest further reduction in inequality. The same
observation, that cash benefits are far more important in
redistributing income than is the direct tax system, appears
to be broadly valid for the period from 1961 to 1977 as
well.
If
society wishes to redistribute income, then it seems the
way to do it, historically as well as on the basis of economic
principle, is via cash benefits rather than progressive
taxation. This view is in line with that expressed earlier
that PAYG pensions should be financed in the way that minimises
leaks from the bucket. Moreover, it is vital that the benefits
used be well designed and operate efficiently, for ill-conceived
benefit payments can cause leaks just as surely as can tax
deductions. The universality of a benefit reduces the disincentive
effects and distortions inevitably generated by any other
benefit design. The distortions created by the UK tax and
benefits system are comprehensively described in Parker
(1995).
As argued above, a PAYG system allows society to choose
how it wishes to redistribute real consumption. A self-imposed
and unnecessary requirement for pre-funding transfer payments
reintroduces the flawed mediator of money and can only hinder
the process.
One
of the critiques offered of PAYG welfare schemes is that
they may lead to inter-generational redistribution. That
is, a PAYG pension scheme may cause the lifetime incomes
of some cohorts of people to be higher than they would otherwise
have been, at the expense of other cohorts. This is the
second equity issue to be addressed in this section. Does
such inter-generational redistribution occur and, if so,
does it matter? It is worth stressing that it matters to
the policy debate in that some writers, such as Shapiro
(1997) assume that it does occur and argue against PAYG
pensions on this ground.
In
a paper addressing directly the first of these questions,
Hills (1992) acknowledged that the generation in or nearing
retirement when a welfare state is introduced will be net
beneficiaries - they get two boxes of chocolates in Hills's
analogy. The reason for this is that they will have contributed
little to the scheme over their lifetime because for most
of their lifetime the scheme did not exist; but if the scheme
includes pensions and health care then, as older persons,
they will benefit significantly in their twilight years.
However, this need not be at the expense of following generations
- each gives and receives a box of chocolates and so is
neither a net gainer nor a net loser.
Other
generations may also get out of the system more than they
put in and so be net gainers in this sense, but there are
two possible reasons for this. The first is that growth
in GDP may swell the size of the boxes of chocolates over
time, so that the box a generation receives from its successors
is larger than the one it gave away to its predecessors.
One can think of the gains of future economic growth being
shared (redistributed) among generations, and there may
be a sound argument to support this which will be outlined
below.
The
second reason is that there may be change in the size of
the boxes of chocolates arising from things other than GDP
growth (or decline). The hypothesis is that generations
succeed in modifying the welfare system to their advantage
over time. For example, a generation will benefit at others'
expense if welfare spending is skewed towards education
when that generation is in the child-rearing phase of life,
but then subsequently skewed towards pension spending when
that generation retires. This would be a case of one generation
"gaining selfish advantage", in Samuelson's terms,
by free riding.
Note that a generation may be a net loser in circumstances
of falling GDP but long periods of falling GDP are rare
in modern industrial capitalist societies. In any event,
if one is sanguine or even positive about sharing the gains
of GDP growth across generations, then one is presumably
equally comfortable with sharing the pain of GDP decline.
A PAYG pension scheme could ensure that a generation whose
working years are blighted by depressed economic conditions
is not further penalised in retirement by their failure
to save sufficiently during that comparatively difficult
working life.
Discussion
of the inter-generational equity of PAYG schemes all too
often confuses these two sources of redistribution. For
example, Shapiro talks of later generations being burdened
with a "low rate of return" on their pension contributions
(Shapiro, 1997, p.129). By this he means that what a cohort
gets out of the system is not much greater, and possibly
less, than what they contributed. However, as described
above, this could be due to low GDP growth, and if this
is the case then it can be expected that it would also affect
pre-funded pensions. If one wishes to argue that the rate
of GDP growth is deleteriously affected by PAYG pensions
then one has to counter the arguments outlined earlier that
showed this is not easy to demonstrate, either in theory
or empirically.
The
sort of inter-generational redistribution that Hills was
looking for was that due to changes in the size of the boxes
of chocolates arising from things other than GDP growth
(or decline). Hills's empirical work was on the welfare
state as a whole, including education, health and social
security, but it led him to conclude that the UK's welfare
state had not so far led to any inter-generational redistribution
of this sort. Even if Hills had found the reverse, it would
be incorrect to argue for the abolition of PAYG schemes
on the basis that there was this kind of inter-generational
redistribution. If other characteristics of PAYG schemes
are desirable, then the appropriate response would be the
same as the response to criticism of the current method
of financing PAYG pensions (by a payroll tax) as discussed
above - to seek a solution to this particular problem.
Finally,
consider the argument in favour of sharing the gains of
future economic growth. It should be remembered that the
high level of GDP per capita enjoyed by current generations
is not solely the result of those generations' endeavours.
They benefit from capital produced and work done by preceding
generations. For instance, the UK population still enjoys
the benefit of sewers and bridges built by the Victorians.
The issue of the justifiability of inter-generational redistribution
is thus complex. For, with hindsight, it is not clear that
the Victorians would not have been justified in establishing
a PAYG pension scheme whereby those generations would have
shared a little of the benefits of future GDP growth to
which their infrastructure construction had contributed.
In this connection, it would be possible to devise an accounting
system for the state's finances which justified the payment
of a pension out of taxes on the younger members of society
on the basis that the retired have contributed to the provision
of social infrastructure - roads etc. - through their own
efforts and their previous tax payments .
Conclusion
The
case against PAYG pensions is more often than not grounded
in the claim that such a system is inconsistent with the
beneficial operation of the free market. Many non-economist
academics, policymakers and other commentators, as well
as laypersons, take this as a given fact. The discussion
above has shown that in fact the economic case against PAYG
pensions is far from compelling. The size of the 'burden'
of the retired population on the working population is affected
only by the number of pensioners and cannot be altered by
changing the way in which their consumption is financed,
whether by PAYG state pensions or pre-funded private pensions.
The costs of pensions which can differ according to how
those pensions are financed are lower and less visible to
non-economists. They are two classes of costs: the costs
of the resources used to administer the pension system;
and the lost output arising from what Okun termed the leaks
from the bucket used to transfer resources from one group
to another - in this case to the retired. The choice of
financing mechanism therefore can have divergent effects
on the economy, but economic theory provides no unambiguous
predictions of these.
One
of the possible malign effects of PAYG schemes may be relatively
easily tackled, by moving away from taxes on employees and
employers in favour of less damaging taxes such as 'eco-taxes'.
The effect on investment and economic growth due to the
crowding out of private saving is equally theoretically
uncertain, and nor does the empirical research conducted
provide any conclusive evidence against PAYG.
There
is a positive case to be made for PAYG on the ground that
it has advantages in dealing with certain risks, and in
particular inflation risk. To provide pensions which the
National Pensioners Convention would regard as something
worthy of the name, ie with predictability of value, PAYG
is perhaps ultimately essential.
If
there is a desire for some redistribution in favour of the
less well off, and it seems unarguable that this is the
case in relation to the retired portion of the population,
then this requires state action. A CP financed on a PAYG
basis is the most attractive approach to achieving this.
Arguments about inter-generational redistribution arising
from PAYG schemes are often confused and, when properly
formulated, such redistribution does not appear to be a
serious concern.
In short, any pension system appropriate for the twenty-first
century requires an element of state provision financed
on a PAYG basis and this provision should ideally be universal.
We need a citizen's pension.
REFERENCES
Association
of British Insurers (1995), Risk, Insurance and Welfare:
the changing balance between public and private provision.
Atkinson, A.B. (1995), 'The welfare state and economic performance',
National Tax Journal vol. 48.
Brook, Lindsay, John Hall & Ian Preston (1996), 'Public
Spending and Taxation' in Roger Jowell, John Curtice, Alison
Park, Lindsay Brook and Katarina Thomson (eds), British
Social Attitudes Survey: the thirteenth report (Dartmouth
Publishing Co. Ltd., Aldershot, England).
Burchardt, T. & J. Hills (1997), Private Welfare
Insurance and Social Security: Pushing the Boundaries
(YPS for the Joseph Rowntree Foundation).
Caritte, J. & J.B. Williamson (1995), 'An analysis of
the impact of public pension spending on economic growth
in the affluent democracies 1960-1988', International
Journal of Comparative Sociology, vol.36.
Cutler, D.M., J.M. Poterba, L.M. Sheiner & L.H. Summers
(1990), 'An ageing society: opportunity or challenge?' Brookings
Papers on Economic Activity, no.1.
Davidson, Greg & Paul Davidson (1990), Economics
for a Civilized Society (Macmillan).
Department of Social Security (1998), A New Contract
for Welfare: Pensions in Partnership (HMSO).
Duskin, E. (1992), 'Changing the mix of public and private
pensions: the issues' in Private Pensions and Public
Policy (OECD).
Field, F. (1995) Making Welfare Work (Institute of
Community Studies).
Harris, R (1977), 'A Review of the Effects of Taxes and
Benefits on Household Incomes 1961-75', Economic Trends
no.279, January.
Hills, J. (1992), 'Does Britain Have a "Welfare Generation"?
An Empirical Analysis of Inter-generational Equity', Discussion
paper WSP/76, Suntory-Toyota International Centre for Economics
and Related Disciplines, London School of Economics.
Lerner, A. (1959), 'Consumption-loan interest and money',
Journal of Political Economy, vol. 67.
Mead, L.M (1997), 'Citizenship and Social Policy: T H Marshall
and Poverty', Social Philosophy and Policy, vol.14.
Meade, J.E. (1989), Agathotopia: The Economics of Partnership
Hume Paper no.16 (David Hume Institute).
Meade, J.E. (1995), Full Employment Regained? (Cambridge
University Press).
Meijdam, L. & Verbon, H.A.A. (1997) 'Ageing and public
pensions in an overlapping generations model', Oxford
Economic Papers, vol.49.
National Pensioners Convention (1998) Pensions not Poor
Relief
Okun, A. (1975), Equality and Efficiency: the big trade-off
Parker, H. (1995), Taxes, Benefits and Family Life (IEA).
Poortvliet, W.G. & Laine, T.P. (1994), 'A Global Trend:
Privatization and Reform of Social Security Pension Plans',
Geneva Papers on Risk and Insurance Issues and Practice,
no.72.
Rawls, J. (1971), A Theory of Justice (Belknap Press).
Samuelson, P. (1958), 'An exact consumption-loan model of
interest', Journal of Political Economy, vol. 66.
Shapiro, D. (1997), 'Can old-age social insurance be justified?'
Social Philosophy and Policy, vol.14.
Solow, R. (1957), 'Technical change and the aggregate production
function', Review of Economics and Statistics, vol.39,
no.3.
Stuttard, N (1998), 'The Effects of Taxes and Benefits on
Household Income 1996-97', Economic Trends, no.533,
April.
News
Major
Housing Benefit reforms announced
The
Department for Work and Pensions has announced that Housing
Benefit is to undergo the most radical reform since its
introduction in the late 1980s. Amongst the proposals is
one for a standard local housing allowance which would allow
tenants who find accommodation for less than the standard
amount to keep the difference. The proposal, to be trailed
in ten 'pathfinder' areas, is for a flat rate allowance,
based on area and family size.
Working
with councils, landlords and advice agencies, the Department
will evaluate the impact of the reforms and, depending on
the results, may roll them out nationally.
Announcing
the measures in the House of Commons, Secretary of State
for Work and Pensions Andrew Smith said: "Because they're
simpler, standard local allowances will speed up the claims
process, reducing the uncertainties people face as their
circumstances change and make trying a job a more attractive
option." The Secretary of State said the measures will
also help to combat fraud in the housing benefit system
by freeing up resources, and by removing the practice of
high rents being agreed between tenants and landlords.
The
prospectus setting out the Department's proposals entitled
'Building Choice and Responsibility: a radical agenda for
Housing Benefit' is available at www.dwp.gov.uk.
Other
news
In
Search 37, for Summer 2002, the Joseph Rowntree Foundation
reports on research carried out during 2001 on the disincentives
experienced by people with disabilities. The Foundation's
working party examined the 'personal assistance trap': "the
mechanism by which disabled people, in receipt of cash or
support, find themselves deterred from seeking work because
of the punitive charge which local authorities can make
against them if they find themselves a job. These charges
are so severe that disabled people's disposable income can
often be left not much more above Income Support levels
even for those earning an average of £20,000 a year."
While the working party was at work, the Government announced
that income from earnings would be disregarded in any financial
assessment. The group went on to study remaining barriers
to employment, and concluded that "financial and benefit
questions are more easily answered than ones of attitude,
assumption and prejudice." The report, Not just the
Job: Report of a working group on disabled people using
personal assistance and work incentives, by Marilyn Howard,
is published by the Joseph Rowntree Foundation (ISBN 1 85935
072 0, price £14.95).
The
'Traps and Springboards' research project, sponsored
by the European Commission and conducted by a group which
includes the Centre for Research in Social Policy at Loughborough
University, has reported that its main findings can be summarised
as follows: "The extent of inadequate [social] protection
is high (between 10% and 30%) even in countries with well
established [though differing] minimum income schemes such
as Belgium, Denmark and the UK. Groups over-represented
among the non-covered population include the elderly, those
with disabilities, single parents, students, school-leavers
and non-nationals. Five main causes of inadequate protection
have been examined: non-eligibility for minimum income (e.g.
among foreigners, travellers, homeless people), sanctions
and suspensions (particularly in unemployment insurance),
non-take-up, inadequacy of benefits, and deductions made
from benefits to pay arrears of utility bills etc. Only
20% to 25% of all minimum income recipients were reintegrated
each year into the labour market in the period 1993-95 in
Belgium, Denmark and the UK. The differences between the
countries were small."
Catalyst
has published a paper by Paul Spicker entitled Poverty
and the Welfare State. He writes: "We are in danger
of losing sight of what the welfare state is about. It was
not intended to focus on the relief of poverty, but to be
a universal service tiding us over periods of economic difficulty
and preventing us from falling into deeper disadvantage
as a result. … The best way to help the poor within
the welfare state is not to target programmes more carefully
on the poor, but the converse: to ensure that there is a
general framework of resources, services and opportunities
which are adequate for people's needs, and can be used by
everyone. That is what the welfare state was meant to do.
That is what we have forgotten." Further details about
'Catalyst' can be found at www.catalystforum.org.uk, or
at Catalyst, PO Box 27477, London SW9 8WT.
Events
A
hearing on 'Debt and the way out'
Kevin
Donnelly writes: "The Wirral is a des-res peninsula
between the Mersey and the Dee, mostly well off but with
areas of acute deprivation. In the summer of 2002 I was
invited to a Debt and the Way Out hearing in Wallasey. From
the start it was clear that it was to be a hearing for voices
of the debt-ridden, not an occasion for the affluent to
come along and sympathise. There were speakers, some splendid
mime by a theatre group, and the welcome presence of the
Mayor of Wirral Borough council, who spoke warmly of the
venture and stayed long enough to meet the participants.
There were workshops in the afternoon. Mine was on Citizen's
Income, and once again we saw how men were uneasy about
getting something for nothing, as they put it, while women
as usual had no difficulty in seeing the merits of CI. There
were personal testimonies from veterans of the benefits
obstacle race, which recalled Bill Jordan's words in 1984,
that the tax and benefits system is in a mess. It still
is; along with some over-all improvements, the forms are
even longer, and the questions even more intrusive, all
intended to push people into what Hermione Parker once called
'busy-busy make-work jobs'.
When
I was last involved in CI conferences in the UK or in Europe,
the old funding debate was still going in circles: who is
going to pay for a Citizen's Income ? My preference would
be for an optimum income, based on production rather than
hours of employment. Now that French economics students
have begun to protest successfully against classical economic
theory there is a chance for some really new thinking about
funding BI/CI. I hope so."
Contribution
to Discussion
A
funded state pension scheme is a practical possibility and
is a crucial step towards the liberalisation and empowerment
of the individual
by
Anthony Sperryn
British
subject or U.K. citizen? The question is still open and
the evidence is ambiguous. One looks at the buzz words and
slogans: taxpayers' money, prudence, rights and responsibilities,
them and us, standing on our own feet, targeting those in
need and so on and so on and one can well ask the questions:
'who is it all for?' and 'who owns it all?'
And
then one thinks of the administration of the tax and benefits
systems and the minimum income guarantee for pensioners
and one is forced to the conclusion that the majority of
Britons are slaves, working for that supreme slavemaster,
Her Majesty's Treasury.
But it doesn't need much to visualise a change from 'British
subject' to 'U.K. citizen'. The first thing to do is to
abolish the use of the word 'taxpayer' as a means of differentiating
between 'them' and 'us' and, by inference, as a term of
abuse towards those who have the misfortune not to be in
a position to pay any or much income tax. The second thing
is to recognise that each U.K. citizen has, or ought to
have, equal status before the law. One person, one vote.
It does not require much of a stretch of the imagination
then to extend that to mean that each citizen has an equal
share in everything the state (collectively) owns: the public
property, the things, be they roads, schools, hospitals,
government buildings, museums, tanks, fighter bombers -
the lot, that are in the public domain or are part of the
nation's heritage.
I
have recently heard a government adviser say that the government
does not make a good shareholder. But the government, as
representative of the people as a whole, can own things.
It can manage things. It can decide, and may have to decide,
when it is better to get other people to manage things for
it. It can account for things. It must account for things.
It can also recognise when markets fail, or are rigged,
and act as a stabilising force accordingly.
For
the latter task, it has an over-riding duty to step in,
for the sake of the British economy as a whole. It cannot
abrogate responsibility to that latter-day deity, 'the market'.
Markets fail and, as anyone with any experience of the City
knows, markets can be rigged.
Whatever
the state owns has been built up, over the years, from investment
out of taxes (and, possibly, borrowings), from assets that
were acquired by conquest or by custom, and it is all capable
of being valued at today's prices. Roads at current cost,
with allowance for depreciation; the same for schools and
hospitals and the rest. All of it is ours, not 'theirs'.
In general, it ought not to be for sale by this generation
for its own benefit. Much of it has some sort of monopoly
status in the British way of life. Most, if not all, has
an aspect of public service attached to it.
Very
few people want to see it privatised - which is not to say
that private sector management couldn't be brought in to
manage it from time to time. But actual ownership is important
and that belongs to the people as a whole, not just to that
sub-class of people described as taxpayers, nor to the lucky
participants in a privatisation offer for sale, nor to the
winners of some (mostly bogus) process of competitive bidding
or search for value for money.
Where
things have gone wrong is that most of these assets have
become disconnected from the people. The proprietorial link
has gone. The break has come with the questioning of society
as an entity. Reductions in income tax over time have been
matched by reductions in the services the state provides
and, especially, the run-down of the assets involved.
The
National Asset Register is a place to start. Everything
in it could be transferred on Day 1 into a National Pension
Fund. Also, the roads, schools, hospitals and the rest.
The beauty of this scheme is that these assets all keep
their value in line with inflation. What is missing so far
is that the nation as a whole, which owns the assets, has
not been properly accounting for depreciation, nor giving
the owners a return on capital, both of which need to be
set aside out of the general fund of taxation. This is not
hypothecation; it is simply prudent accounting.
Cash flow into the National Pension Fund would also include
a part of National Insurance contributions, together with
credits for individuals unable to make a contribution in
any particular year and, if necessary, something more out
of general taxation. Payments out would be state pensions,
no longer means-tested, at the minimum income guarantee
level, plus investment in infrastructure. That is investment
for the future. Fresh investment might not be required if
the population started shrinking. The level of pension is
for political decision, but has to be adequate to live on.
The
National Pension Fund would thus be comparable to a private
sector pension fund. It would not, in principle, hold stock
market assets, but its assets would all be inflation-linked
in value and would earn an administered rate of return (something
like that on index-linked government stocks, the risk-free
rate of return, currently 2-2.5% plus inflation). (There
is a precedent for an administered rate of return. The independence
of the Bank of England is subject to the requirement to
keep inflation within a specified band.)
Before
New Labour came to power, it proclaimed a wish for people
to have security. The setting up of a National Pension Fund
is an important step in that process. A further advantage
of this proposal is that, once the level of the state pension
has been set, an automatic annual increase of 2-2.5% over
inflation can be built in, no problem, as an equivalent
to the earnings link. The disadvantage is the loss of the
Chancellor's ability to decide by how much to uprate pensions.
There
is a neglected, but profound, truth in economics: that one
cannot save spending power. One can only use investments
that promise a future call on spending power. Share of GDP
is what is in question. The current balance of dividends,
interest and taxation is not providing security for our
pensioners. A mechanism that automatically locked in a share
of GDP that produced an adequate pension for all must surely
be an improvement which all would welcome.
Reviews
Sheila
Shaver, 'Australian Welfare Reform: From Citizenship to
Supervision', Social Policy and Administration, vol.36,
no.4, August 2002, pp.331-345.
Shaver's
paper examines the implications of welfare reform for the
meaning of social citizenship in Australia. She concludes
that deepening emphases on the market, the family, and individuals'
moral obligation to sustain themselves are moving welfare
provision from being a limited social right to being conditional
support, and are moving Australia's understanding of the
human person from that of a sovereign individual to that
of a subject of paternalistic supervision. "Hidden
in the shift from rights to conditional support, and from
sovereignty to supervision, is a denial of the equality
of selfhood as the price of welfare assistance" (p.342).
To
generalise a point which Shaver makes, following Offe's
suggestion that there has been "a loss of political
support for class-based collective strategies of equality
and redistribution," (p.342): individuals throughout
the Western world now see themselves as over against the
welfare state, evaluating it against other possibilities,
rather than as members of it. In this context, as Shaver
recognises, welfare states (and political parties of the
left) are adapting themselves to this new situation. One
consequence of this adaptation is that the fostering of
equality is no longer an aim (either explicit or implicit)
of social policy.
This
paper is about Australia, but there are significant parallels
with the ways in which welfare provision is changing in
the UK and the USA. In all three, obligations balance, and
sometimes outweigh, the individual's rights. Whilst these
concepts cohere with the notion of liberal social citizenship,
policy changes are beginning to damage the foundations of
such a liberal society. "The shift from support available
as of right to assistance provided on condition violates
the presumption that all citizens are equal in status, dignity
and worth that is necessary for full participation in democratic
society. The shift from the presumption of individual sovereignty
to welfare supervision entails levels of intrusion into
spheres of privacy and individual volition that have been
highly protected in liberal society. Much of the development
of twentieth-century welfare has been concerned with the
assertion of equality in precisely these respects. It is
this development of equal social citizenship that contemporary
liberal welfare reform is now putting in question"
(p.343).
Shaver
sees Tony Atkinson's concept of a 'participation income'
(quoted from our Bulletin no.16) as part of the same process,
away from a citizenship of belonging and towards a citizenship
of active participation - with the corollary that anyone
not participating is no longer regarded as a citizen.
But
maybe the difference is one of degree rather than of kind.
If the criteria for 'participation' were to be drawn sufficiently
broadly then there would be few members of the population
not receiving the participation income, especially if it
were to be paid to those adults deemed unable to participate
actively in society by virtue of illness or disability.
Atkinson's own criteria are very broad, and the Citizen's
Income Trust's research when he first made the proposal
ten years ago suggested that only about 1% of the population
would not be receiving the participation income - meaning
that it would be cheaper to pay a Citizen's Income than
to continue to administer a participation income which would
require the policing of participation criteria.
Yes,
there is a shift going on in our understanding of citizenship,
and changes in welfare provision both respond to and help
to drive that change. Child Benefit, by ameliorating the
poverty and unemployment traps, represents a citizenship
both of belonging and of participation. A Citizen's Income
would do the same.
Martin
Evans, Michael Noble, Gemma Wright, George Smith, Myfanwy
Lloyd and Chris Dibben, Growing together or growing apart?
Geographic patterns of change of Income Support and income-based
Jobseeker's Allowance claimants in England between 1995
and 2000 (The Policy Press for the Joseph Rowntree Foundation,
2002).
This
report is precisely what it says it is, and the thorough
nature of the research and its careful conclusions will
be of considerable service to policy-makers. The researchers
conclude that "there have been very different rates
of change in different areas, and the areas with the highest
numbers and proportions of claimants in 1995 have tended
to be slower to participate in the overall national economic
growth" (p.81); that some claimant groups have increased
in size (for instance, people with disabilities) (p.81);
and that "there has been increasing polarisation between
wards with high and low claim rates from 1995 to 2000"
(p.82). Generally, claimant numbers have declined between
1995 and 2000, and claimant numbers have declined in the
wards with the highest claim rates even if claim rates haven't;
but in 2000 there were still 3.8m claimants of Income Support,
Job Seeker's Allowance and Invalidity Benefit in England,
and about half of them lived in the 20% of wards with the
highest claim rates.
The
report suggests that future research should take the analysis
further, to the level of the individual. We would encourage
this. It would bring into the spotlight not only the ways
in which location and personal characteristics influence
the probability of leaving benefit, as the researchers suggest:
it would also enable questions about disincentives to be
asked. The development of a disincentive index (an important
component of which would be the maximum marginal rate of
benefit deduction experienced by an individual entering
employment or increasing their earned income) might go a
long way towards uncovering some of the reasons for the
differences between claim rates in different areas and amongst
different groups of people.
Robley
E. George, Socioeconomic Democracy: An advanced socioeconomic
system (Praeger, 2002). Paper back. £18.99.
Order
this book
In
this book Robley George combines discussion of a Universal
Guaranteed Personal Income (with its level democratically
agreed) with advocacy of a Maximum Agreed Wealth (with the
level again democratically agreed). The style is rather
quaint (and there are too many adverbs), and the book is
overlong (and could have been half its current length),
but it contains a road-map which, if followed, would lead
to a democratic and socialist society.
The
first chapter defines 'Universal Guaranteed Personal Income'
(UGI): "Society guarantees some minimum amount of purchasing
power to each citizen, with citizenship the only requirement
for eligibility" (p.8). As we suggested in our last
edition, 'guarantee' is ambiguous as it can suggest either
an automatic, universal and non-withdrawable payment or
a means-tested guarantee.
Chapter
2 compares a Basic Income to a Negative Income Tax, and
then relates the ideas' histories and a variety of unresolved
dilemmas related to the concepts. The argument rambles and
is rather colloquial, but there is useful material, especially
the historical.
Chapter
3 is about the 'Maximum Allowable Personal Wealth' (MAW),
and mainly about different kinds of taxation; chapter 4
is about democracy and the different ways in which the population
might control the levels of the MAW and the UGI; chapter
5 is a short passage on different types of society; chapter
6 offers justifications for MAW and UGI; chapter 7 offers
a history of Islam and discusses Islamic taxation and its
treatment of wealth; chapter 8, in discussing economic incentives,
suggests that the MAW offers an incentive to the wealthiest
to increase others' wealth so that they will vote for a
higher MAW; chapter 9 discusses practical approximations
to a UGI (such as means-tested benefits with work tests);
chapter 10 is about financial benefits and costs; chapter
11 is about realisability; and chapter 12 is on ramifications
in relation to ecology, budget deficits, etc.. There is
an appendix containing questions for further study or discussion
- and if this were a shorter book with concluding paragraphs
for each chapter then it would indeed have been suitable
for sixth-form study. For instance, it would be useful for
a class to discuss the feasibilities of a government-controlled
Citizen's Income and of a democratically-controlled UGI,
and to ask itself whether a 100% tax rate (which is what
a MAW would imply for high earners) would ever be politically
feasible.
Tony
Atkinson is quoted in the bibliography but not the surely
essential Public Economics in Action.
This
is a useful book as it should stimulate important debate
in the USA. Its importance for a European readership is
that it reveals a serious gap in the market: since Tony
Walter's Basic Income and Hermione Parker's Instead of the
Dole are now out of print, there is no accessible book-length
introduction to the Citizen's Income debate for a British
or European audience.
Peter
Saunders, Jonathan Bradshaw and Michael Hirst, 'Using Household
Expenditure to Develop an Income Poverty Line', Social
Policy and Administration, vol.36, no.3, June 2002,
pp.217-234.
Income
and expenditure measures are commonly used to establish
poverty lines representing, respectively, the availability
of cash resources and the standard of living approaches
to measuring the extent and composition of poverty in the
UK. Using UK data (and also Australian data) the researchers
compare these two measures and find that while the overall
poverty rates are similar whichever measure is used, the
relativities they imply for different types of household
differ considerably. They find that there is little overlap
between income and expenditure poverty, and that very few
households are both income- and expenditure-poor.
The
authors define their own concept of poverty as constraint
on choice or constrained expenditure, and identify its presence
by discovering where there is absence of spending on durable
goods and luxury items. They then derive income thresholds
for observed levels of constrained expenditure for different
types of household. They assume that in such households
all income is spent, and they are thus able to define poverty
lines below which expenditure is severely constrained. Income
support rates are then compared with these poverty lines.
The
article draws attention to the limitations of the Family
Expenditure Survey data, identifies future research needs,
shows the value of exploring the links between income and
expenditure, and makes suggestions as to how new poverty
measures might be calculated by employing both income and
expenditure data; but its longer term importance surely
lies in its definition of poverty as constrained expenditure.
If this is to be the definition of poverty, then it will
be essential to include in the definition of poverty a household's
ability and opportunity to increase its income. If there
are significant barriers to a household increasing its income
then expenditure will be more constrained over time and
poverty will be deeper, and if there are fewer barriers
to a household increasing its income then expenditure will
be less constrained over time and poverty will be less deep.
This necessary factor in the calculation of poverty will
require such barriers to be quantified.
It
is to the quantification of the barriers to a household
increasing its income that the research agenda must now
turn.
Paul
Treloar, 'New Tax Credits', Benefits, number 33,
volume 10, issue 1, February 2002, pages 49-52.
This
is a useful discussion of the nature and likely effects
of the new Child Tax Credit announced in the 2000 budget.
For the government's proposals see Opportunity for All:
Making Progress, published by the Department for Work and
Pensions in September 2001, Cm 5260, £22: "From
2003 we will introduce an integrated child credit, which
will bring together all existing income-related benefits
and tax credit support for children into a single source
of income, providing financial support to families both
in and out of work. This will build on the foundation of
the universal Child Benefit, along with extra help for families
on low incomes." A description of the move to tax credits
and of the international context is followed by a discussion
of the contradiction between our individual-based income
tax system and the family-based Working Tax Credit (which
will soon replace the Working Families Tax Credit and the
Disabled Person's Tax Credit) and CTC (Child Tax Credit:
the new name for the integrated child credit). A welcome
proposal is that no upper capital limit will apply to receipt
of CTC: instead, actual investment income will be taken
into account. This will make tax credits more like the rest
of the income tax system. Similarly, there will be no work
test for CTC, with assessment being made purely on the basis
of family income.
Like
Child Benefit, CTC will be paid in full to recipients of
Income Support or income-based Job Seeker's Allowance; and
because it will be received by low earners it will provide
a new level of income security during employment-pattern
transitions. This is one of CTC's most attractive features.
The
article bemoans a continuing lack of detail relating to
tapers and levels of CTC, pointing out that it is the detail
which will determine whether CTC will reduce poverty and
make work pay.
Benefits,
number 34, volume 10, issue 2, June 2002, Work after Welfare
This
edition of Benefits suggests that the agenda has moved on
- or rather, that it ought to do so. As Robert Walker writes
in his editorial, "getting people from welfare to work
is last year's problem, and a comparatively easy one at
that, certainly when compared to the task of keeping job
entrants in employment … Sustaining people in rewarding
employment is a much greater challenge" (p.83).
Richard
Dickens, in his article 'Is welfare to work sustainable?',
discusses the increases in both relative and absolute poverty
which have taken place between 1979 and today, commends
the government for taking a variety of steps to remedy the
problem, suggests that the current work-based policy is
not enough because it "may shift individuals into long-term
in-work benefit dependency and possibly in-work poverty"
(p.88), and concludes that those who move in and out of
low-paying jobs will remain in poverty because job retention
is low and there is little progression into higher-paid
jobs. "Perhaps another strategy that the government
should take more seriously is to tackle the primary earnings
distribution" (p.89).
In
response to the problem which Dickens discusses, there are
new policy initiatives here and in other countries aimed
at supporting people in employment through a case-work approach.
Karen Kellard's article, 'Job retention and advancement
in the UK: a developing agenda', examines new policy in
the UK, and in 'The road to sustained employment: lessons
from a US job retention intiative', Anu Rangarajan discusses
new developments in the USA. Both articles conclude that
flexible schemes tailored to individuals' needs are what
is required.
A rather different approach is 'Workfare': compulsion to
accept employment (State-provided if necessary), the refusal
of which results in loss of benefit. In 'Rhetoric and retrenchment:
'common sense' welfare reform in Ontario', Dean Herd finds
that, far from being the success it is claimed to be, a
Canadian workfare scheme has removed large numbers of people
from benefits by "reducing welfare services and tightening
eligibility requirements" (p.105).
When
read together these well-researched articles argue for an
entirely 'carrot' approach: that is, if work doesn't pay
(literally), then 'making work pay' won't work as a means
of 'welfare to work'. An important means of making work
pay must surely be to reduce the marginal tax rates which
people suffer. Tax credits have reduced these to between
60% and 70% for most low-earners. This is not low enough.
The problem is, of course, that if, under the present structure,
they are reduced further, then disincentives are moved further
up the earnings scale. The only answer to this particular
part of the problem is to replace tax allowances and tax
credits with an unconditional cash payment and then to tax
all or most earned income at rates lower at the bottom of
the earnings scale than at the top.
Tania
Burchardt and Julian Le Grand, Constraint and Opportunity:
Identifying Voluntary Non-Employment (CASEpaper 55,
Centre for Analysis of Social Exclusion, London School of
Economics, 2002). A summary appears as CASEbrief 22.
This
paper attempts to assess the extent to which the behaviour
of an individual in the workforce is the result of the constraints
which they face or of the exercise of preferences. Four
'layers' are used to measure the extent of opportunity for
employment: 1. those factors over which an individual has
no control (such as age); 2. those factors over which someone
has no control at present (such as educational achievements);
3. those factors which someone can change in the near future
but where high costs of various kinds might be experienced
(such as place of residence); and 4. those factors which
someone could change easily (such as starting voluntary
work).
The
researchers start from the position that all non-employment
is voluntary and then introduce into their analysis the
constraints in layers. If the model predicts that someone
has a high probability of being in work, and he or she is
not in work, then they are regarded as voluntarily out of
work.
The
researchers conclude that if the only factors regarded as
beyond someone's control are age, gender, ethnicity, and
parental social class, then British Household Panel Study
data show that 35% of all men and half of all women not
in work are out of work through choice; if health, labour
market experience and education are also regarded as beyond
an individual's control, then 20% of men and 31% of women
not in work are voluntarily so; and if place of residence
and family responsibilities are also regarded as beyond
someone's control, then again 20% of men are not in work
voluntarily, but the proportion of women not in work by
choice falls to 25%.
The
authors recognise that there might be 'unobserved constraints'.
One important constraint is the high marginal tax rate suffered
by many people who enter the employment market, and another
(less quantifiable) constraint is the uncertainty people
experience about the level of change in net income. It is
one thing to know that net income will rise very little
if you enter employment; it is another not to know how much
income will rise or fall, whether free school meals will
still be available, or how long it will take to recalculate
housing benefit if employment proves to be short-term.
The
research reported in these papers is a valuable start. It
is to be hoped that the research will continue, and particularly
that it will research the effect of these additional two
constraints on whether or not individuals enter the labour
market, and that it will go on to quantify the effects of
the reduction of such constraints which would occur if either
Child Benefit were increased, or proportions of tax allowances,
tax credits and means-tested benefits were to be paid as
nonwithdrawable cash benefits.
John
Hills, Julian Le Grand and David Piachaud (eds.), Understanding
Social Exclusion (Oxford University Press, 2002), £50,
hb, 274+xiv pp. Paperback £21.99 Order
this book
The
replacement of 'poverty' with 'social exclusion' in political
debate is not merely a change of terminology designed to
include in the debate those who think that there is no such
thing as poverty (though it is that), for 'social exclusion'
encompasses a field of interest broader than that encompassed
by 'poverty'. For one thing, the new terminology draws attention
to someone's exclusion from active participation on family,
community, national, and global levels, and it invites a
dynamic analysis rather than snapshots of people's resources
at a particular time.
The
first and second chapters explore the meaning of 'social
exclusion' by relating social inclusion to social justice
and social solidarity in such a way as to suggest that an
increase in inequality translates into an increase in social
exclusion. Chapter 3 seeks measurable definitions of participation
in order to measure social exclusion (though because consumption,
production, political engagement and social interaction
relate to outcomes rather than restraints, measurable definitions
of disincentives to participation are not sought - and surely
disincentives to participation are an important part of
the definition of social exclusion). Chapter 4 studies poverty
dynamics, i.e. the ways in which people move in and out
of poverty, and concludes that there is a group of people
who experience poverty more often than most. Chapter 5 is
on social exclusion across the generations; chapter 6 shows
how family resources affect people's experience of social
exclusion; and chapter 7 shows how Housing Benefit, Council
Tax Benefit and the Working Families Tax Credit reduce incentives
to employment and thus increase social exclusion. (This
is particularly important because poverty in low-wage families
affects children and increases the likelihood of their social
exclusion). Chapter 8 is on the effect of concentrations
of disadvantaged people in particular neighbourhoods; chapter
9, on child poverty, suggests that an adequate minimum income
is necessary for those out of work to prevent their children
from experiencing poverty; and chapter 10 shows that some
social policies aimed at preventing social exclusion can
simply move the problem elsewhere (for instance, policy
aimed at keeping the unemployment count low can increase
the number of people claiming sickness benefit) and that
policies which respond to existing social exclusion are
needed to prevent existing social exclusion from causing
more social exclusion in the future. Chapter 11 is on education's
role in preventing social exclusion; chapter 12 is on the
relationships between social infrastructure, community participation
and social inclusion; and in chapter 13 John Hills asks
whether a focus on social exclusion changes the policy response
and concludes that a dynamic analysis is needed: for instance,
it is important to help families to reduce from two earners
to one earner rather than from two earners to no earners
so that it can then more easily return to being a two-earner
family. In this connection universal benefits are recommended,
not because they redistribute income differently at a particular
time (which they don't necessarily) but because they contribute
to social solidarity and thus decrease social exclusion.
This
book is a fund of useful research data and results, and
the concluding sections of each chapter provide important
indications as to where social policy should be going if
we want to reduce social exclusion in our society. Thoroughly
recommended.
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