BI+FT & pensions

Our population is increasing, to a large extent because people are living longer and maintaining their health for longer. That is a good thing. Yet present policy treats it as a problem. The policy debate focuses on the likelihood (under current arrangements) that we will be short of workers, and facing higher bills for state pensions while the tax-take from the working population declines. That is because the age of retirement has not kept pace with the extension of life expectancy.

Why a one-size-fits-all retirement age?

Why should there be any state-mandated age of retirement, universally applicable to everyone, other than the arbitrary distinction between men and women (who live longer but retire earlier)? Some people will expect to live longer than others, and some jobs are more physically wearing than others. A one-size-fits-all age of retirement takes no account of people's individual circumstances and characteristics.

This standardization is made necessary by the provision of a state pension. There has to be a date on which it starts, and it is not practical to vary that calculation to different circumstances.

Retirement age and state pension made defunct by Basic Income

A Basic Income can make this arbitrary dividing line unnecessary and obsolete. Basic Income would replace the state pension. You will continue to receive after the age of 60 or 65 what you received beforehand. The state will have no say or influence on the age at which you choose to retire. You may continue to work full-time or part-time, or switch to a less onerous job. You can start drawing on your savings without having to give up work or sacrifice your welfare entitlements. Retirement becomes simply a matter between you and your employer, in which the state has no interest.

The cruelty of government deceptions and incentives on pension-funding

The relative poverty in which many older people find themselves nowadays is largely a creation of government policy and deception. Our pensioners were told that their National Insurance payments would fund a state pension sufficient to live on in old age. If true, there was little need to save additionally, and with the aggressive means-testing of some benefits and care-provision, there was little point either. Someone on modest earnings, taking government information and incentives at face-value, would have been rational to aim to pay down debts before retirement, but to save little extra.

Honour pensioners' reasonable expectations, but change them over time

We have a moral obligation to our pensioners not to betray the expectations that governments wrongly allowed them to hold, but the reality is that we cannot allow these expectations to be maintained for younger generations. It is essential that current workers understand that the state will not in future be able to afford to pay a sufficient state pension to maintain more than a minimal quality of life to everyone over the age of 60/65, or even 68 (as the retirement age will move towards in the coming decades, entirely too slowly). People will have to learn that, if they want more than a basic minimum, they will have to save some of their earnings to support their quality of life in retirement. It is too late for current pensioners, and there isn't much that those approaching retirement can do about it. But the younger the persion, the less expectation of state-provision it is reasonable for them to hold, and the more it is reasonable to expect them to save for their old age.

Consequently, to the extent that there is a discrepancy between the level of the Basic Income and current pension provisions, a top-up benefit should be provided to bring the combined income from Basic Income and top-up to the level that current pensioners could reasonably have expected from the current system. But the level of this top-up should be gradually reduced for those retiring over the next twenty years, until we reach the point where those over the retirement age (as was) receive only the same Basic Income that everyone else receives. In practice, the state pension has fallen so far behind earnings and some essential costs that there is not likely to be a big gap even at the start between the level of the Basic Income and the anticipated value of the state pension.

Remove disincentives to save

Besides making it clear to those below retirement age that it will be increasingly necessary to save in order to enjoy more than a minimal income in old age, the government's other vital contribution should be to remove disincentives to saving. As a Basic Income would replace most current old-age benefits (other than those relating to medical need), and as the Basic Income is unconditional and not means-tested, the transition to a BI+FT system should significantly reduce disincentives to save, as any income received from savings will be additional to the Basic Income.

The level of the Flat Tax on income from private pensions and savings should also be set low enough not to discourage savings. Flat Tax on earnings and dividends will have to be set at the same level, because of the ease of disguising one as the other in certain circumstances, but the Flat Tax on savings could be at a lower rate without too much risk of perverse incentives. A single rate for all forms of income would be ideal, but would depend how low the Flat Tax on earnings could be brought.

Financially, the old should have it easier than the young

In one sense, it is strange that we ever thought that those over retirement age should require more support than those younger than them. People in their twenties and thirties may not be far up the career ladder. They will have had little time to save money, nor to acquire possessions. On potentially low income and minimal savings, they may well be trying to bring up a family, buy a house suitable to bring up the children, furnish the house with essential items, pay the bills for adults and children (including food, clothing and education), and putting something away for old age. Pensioners, on the other hand, should have had enough time to pay off their mortgage or save enough to continue to pay the rent (if they didn't buy), to furnish the house and clear any debt, and won't have had to pay for the children for some time. What kind of delusion were we peddling to them that they need not use their indian-summer and autumn years to save for their winter, but could spend it, safe in the knowledge that the state would provide for them (from money supposedly put aside out of taxes, but actually spent long ago) when it came to it?

This does not refer to medical treatment. Those costs obviously increase substantially for most people in old age. These should be treated according to medical need and funded in accordance with healthcare-funding arrangements, avoiding any confusion of welfare needs with medical needs. But apart from medical needs, there is no obvious reason why the minimal needs of the old should be greater than the minimal needs of the young.