Issue 191 of SOCIALIST REVIEW Published November 1995 Copyright © Socialist Review

'The average age of the population is rising so massively and steadily that it constitutes the central problem of state welfare provision. The relative political and economic power of the young in Britain is declining and there is little to be done about it.' So said Neal Ascherson in the Independent on Sunday as he gave a rather gloomy prospect for the future of the old in Britain into the 21st century.

Nor is he alone. In 1994 the World Bank published a book entitled Averting the Old Age Crisis in which it argued that the ageing populations in many countries are a major problem that threatens the sustainability of current pension arrangements. And the International Labour Organisation warns of a Europe wide crisis in the financing of welfare.

It is argued that with the advance of medical science and an ageing population, as the 'baby boomers' from 1945-51 begin to reach retirement age, the ability of the state to sustain the section of the population that no longer works is greatly reduced.

It is worth reminding ourselves that the majority of pensioners in Britain in the 1990s struggle to make ends meet, often live in poor housing, unable to keep themselves warm in winter, have a poor diet and receive barely the minimum of care. Each year thousands of old people die needlessly of hypothermia or from other poverty related causes.

Shortly after being elected in 1979 the Tories launched a rather vicious attack on pensioners. They changed the basic state pension from being linked to average earnings to being linked to increases in the price index. Over the years this has led to a significant decline in the state pension. If this change had not been made, the basic pension for a single person would now be £19.25 a week more, and, for a married couple, £30.55 more. If the current formula had been used since 1948, when the basic state pension was introduced, the single person's pension would currently be £23 a week. Relative to average incomes the pension, was lower in 1992 than it was in 1948, and if the link between earnings and pensions is not restored, it will fall to 7.5 percent of average gross male earnings by 2040.

It is not true that the state faces a burden of care of the elderly that it is unable to meet. The ageing population is not 'out of control'. The number of people above the retirement age is set to increase over the coming years, from 9 million people aged over 65 today, to a projected 15 million by 2040 before falling again.

At the moment there are around four people of working age for every pensioner; around 2040 it will be more like three to one. However, it is only certain that pension spending as a percentage of GDP will rise if there are no changes in other terms. But this is unlikely--in particular, GDP per employed person (labour productivity) rises over time. In the period 1985-92 output per person employed in the UK rose at an average rate of 1.5 percent; the average rate between 1960 and 1990 was 2.2 percent. As the economy develops and as the labour of those who work produces more goods (through the introduction of new technology, for example) so there is a greater ability to meet the needs of an expanding ageing population. As a recent report by the Association of British Insurers said:

'The notion that a demographic time bomb is going to render public pension provision unaffordable in the first half of the next century is open to challenge.'

Furthermore the Tories have already taken action to ensure 'support' does not mean huge tax increases to fund pensions--firstly by raising the woman's retirement age to 65, and secondly by cutting the final cost of the State Earnings Related Pension Scheme by more than two thirds. The Independent on Sunday said recently, 'As a result... the proportion of the earnings required to fund state pensions is not set to rise in the next century at all--it is set to fall. In other words, on current policies, the taxation to fund state pensions will cost less in real terms in 2040 than it does now.'

John Hills said in The Future of Welfare:

'Much discussion about the welfare state starts from the presumption that a demographic time bomb is ticking away which will cause an unsustainable explosion of welfare costs unless action is taken to defuse it by cutting back now. It is clear that such concerns have been considerably exaggerated. There are upward pressures on welfare spending for a whole range of reasons, including ageing of the population, the maturation of SERPS, worries about educational standards compared to other countries, and caring for very elderly people. However, looking over several decades, the total effect of such pressures is no greater than the effects of the recession on welfare spending over the past three years. The future performance of the economy and the level of unemployment in particular will have as great an effect as demography by itself.'

Britain has relatively well developed occupational and private pensions with some £500 billion invested in them, more than in the whole of Europe put together. In 1980 state benefits provided around 60 percent of income for pensioners on average, whereas ten years later this had fallen to around 50 percent. Occupational income and investment income had grown in importance, something which is obviously weighted in favour of the rich. Those whose main source of income is the state pension are beginning to suffer the effects of the switch from state to private pensions. However, we have to be careful when we look at the average figures as they cannot be relied upon to represent what has happened to all pensioners. A group of younger pensioners with occupational pensions built up between the 1950s and 1980s is replacing older pensioners who mainly do not have occupational pensions. But a substantial number of even new pensioners do not have occupational pensions or private savings and remain heavily reliant on state pensions. It is significant that in 1990-91, 62 percent or more of people aged 75 and over were in the poorest three tenths of income distribution.

Pension spending as a percentage of GDP in Britain increased from just under 4 percent in 1960 to just over 6 percent in 1985, while the equivalent increase in Germany was from just under 10 percent in 1960 to just under 12 percent in 1985; in Italy it increased from just under 6 percent to 16 percent.

Will Hutton has argued in The Guardian that social security spending in Britain (which, along with pensions, includes health, education and benefits) is among the meanest in the world. Only Japan among the Group of Seven leading industrialised countries spends less, at 12.8 percent of GDP, compared to Britain's 13.9 percent--even the US has higher spending--at 14.2 percent of GDP on social security. As Hutton states:

'Apart from Iceland, Britain runs the meanest, tightest, lowest cost social security system in the world, and it is set to become more so. Newt Gingrich and the Republican Right will do well to get near the British example. The British "success" arises in part because it permits its recipients to live in conditions of greater relative poverty than any other country--and in part because pensions, one of the most expensive parts of the welfare provision, are organised not around the pay as you go principle so that the Exchequer bears the cost, but are mainly funded out of savings invested in the world's stocks and shares.'

Following the death of Robert Maxwell in November 1991, it emerged that he had stolen millions of pounds from the pension funds of his various companies. As a result the Tories were forced to set up the Pension Law Reform Committee, whose recommendations formed the basis for the 1995 Pensions Act. Although the committee submitted 217 recommendations for changes in the way that occupational pensions are regulated, the Tories have used it to attack the state pension even further.

One of the most vicious attacks has been on women as the Pensions Act raises their retirement age to 65. Research commissioned by the TUC has shown that cutting five years state pension entitlement will mean a woman of 20 losing £15,000 at today's prices, a total which rises to £42,000 (assuming an inflation rate of 2.5 percent) up to her retirement date. If the woman wanted to cover this loss with a personal pension it would cost her £250 a month in contributions.

The Pensions Act also attacks the State Earnings Related Pension Scheme (SERPS). SERPS provides an additional pension on top of the basic state pension, and individuals can opt out as long as their pension provision meets certain requirements. The Pensions Act, along with other recent changes by the Tories, has made SERPS less attractive while making opting out much easier. This cut to SERPS is another blow to women--only 3.9 million women have occupational pensions compared to 6.8 million men. And changes in the way that average earnings are calculated will hit both men and woman as the effect will be to reduce the amount of SERPS paid.

Finally, the so called 'equal treatment' that has been included in the Pensions Act has meant a further attack on pension entitlement. In May 1990 the European Court gave a judgement in favour of a man who had less favourable early retirement benefit than a woman would have had in the same situation. This produced shock waves in the pension industry. However, this decision has been turned on its head in the Pensions Act and allows schemes to reduce benefits for women.

In 1992 some 3,869,000 pensioner households were receiving means tested benefits. Of these, 1,414,000 single people over 60 and 229,000 couples were claiming income support. Attacks by the Tories over the last 15 years have led millions to fear that the last years of their lives, instead of being secure and happy, will bring poverty and hardship with a government that cares little for them now that their labour is no longer needed.

A test you can't pass

The attacks on pensions is only one part of a generalised assault on welfare and benefit spending. If we look at actual spending on the welfare state, there has been a dramatic rise in social security. Its share of spending is up by a half from 22 percent of government spending in 1979 to 31 percent today. However, this is largely due to the high levels of unemployment--some £13 billion of last year's £85 billion benefit is directly attributable to the rise in unemployment. It is also due to the dramatic switch in housing subsidies away from the bricks and mortar of council houses to the rents that people pay. Higher rents, more unemployment and rises in indirect taxation (such as VAT on fuel) mean that almost one in three people now live in households where someone is claiming one of the three main means tested benefits--a rise of 50 percent on 1979.

Attacks on the general level of welfare provision have been combined with questioning the principle of universal benefit--the idea is that everyone is entitled to benefits regardless of income or assets. By targeting benefit, it is argued, you are able to help those most in need, maybe with a little extra, and yet cut welfare spending as a whole. As the No Turning Back Group of Tory MPs said, 'The eventual elimination of universal benefits would free up sizeable sums of money to be spent on people who need the money most. A substantial reduction in the overall cost of welfare spending could also be made.'

This is an absolute lie. Universal benefit does not go indiscriminately to all, but is targeted to those in most need, and does meet wider aims than poverty relief. The net effect of benefits financed through tax is redistributive towards those with low incomes. As the Rowntree Report states, 'Reducing universal benefits in order to keep taxes down delivers net gains to those with high incomes, the reverse of what is often suggested.'

Means testing also exacerbates the disincentives of people to claim, and is an expensive way of administering benefit.

The argument of targeting benefit was used to support the setting up of the Social Fund--the 'emergency fund' set up in 1986 to replace grants for people on income support with interest free loans to buy furniture, cookers or other capital items.

Recent figures show that almost a quarter of a million applications to the Social Fund have been turned down because those seeking help were judged too poor to be able to repay the loans. Refusals on the ground of inability to pay have more than doubled since 1992-93, up from 44,890 to 116,095 last year. Those with existing loans or who already have direct deductions to meet fuel or other debts can be refused a loan on the grounds that they have too little benefit left to make the repayments.

It is one thing to claim that through targeting the state can meet the needs of those most vulnerable, it is another to then use their poverty as an excuse for denying the benefit which they are entitled to. The Social Fund has been used to cap social spending, and it is the poor who suffer.
Pete Morgan