Dangerous giveaways: Osborne’s pension reforms

James Bartholomeusz, Michael Bartholomeusz

It is hardly unusual for pre-election Budgets to be packed full of attractive giveaways and high-publicity bribes for voters in the run up to polling day. Indeed, the last Labour government was no less prone to this sort of political strategizing than any other. We tend to expect more careful economic thinking directly after an election than before: but, even so, there comes a point where tactical positioning tips over into wilfully irresponsible policymaking. The coalition’s latest pension changes, characterised by their combination of haste and dubious foresight, most certainly qualify as the latter – even more so in light of the Tory commitment to budgetary surplus by 2019-20.

The 2014 Budget legislated for giving over-55s the ability to withdraw all their savings held in defined contribution (DC) schemes whilst not purchasing an annuity, a policy that came into effect on 6th April this year. In theory, anyone above the appropriate age can now withdraw their entire DC pension before voting stations open on 7th May.  Liberal Democrat pensions minister Steve Webb has remarked that “[i]f people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice”.

Yet, considering the increasing number of people in Britain who are burdened by debt that needs to be repaid, often well into retirement, is it reasonable to think the state pension alone would cover that debt, in addition to living expenses?

We might say that the social-democratic welfare state is a system in which everyone is looked after to the best of society’s ability, and where opportunities for abusing this system of care are eliminated to the greatest possible degree. If we want a system like this – which, despite assaults from successive administrations, has stood since the Second World War – we must be willing to limit the freedom and choices of individuals not just in the present (for example, by requisitioning some portion of private income in order to fund public spending) but also in the future. Take the example of healthcare: given the evolving burdens on the NHS, we recognise the pressing need to prevent the onset of chronic and fatal diseases like diabetes and lung cancer, rather than attempting to manage those problems once they arise. The welfare state is fighting a losing battle if it allows certain choices made today to cause major problems further down the line.

One might have thought that the Conservatives would be more concerned with retaining what is good about the present and planning for the future, rather than backing plans to provide short-term gratification. Such has been the enthusiasm for this dramatic lurch that there has been no attempt to maintain a progressive sliding scale so as to protect the most vulnerable.

It apparently crossed no one’s mind that there may be very good reasons for why such liberalisation has not been put into practice before. The impulse behind it derives from the libertarian belief in personal responsibility which suggests that it is generally better to allow people to govern their own lives without intervention from the state. We can follow this line of argument from the basic protection of civil liberties right through to the Nozickian notion that taxation is equivalent to forced labour. On this view, people should be allowed to rise and fall based on their own decision-making. For our purposes, the argument suggests, have all your pension in one go, but if you decide to blow it all quickly then that is your choice, and you will have to deal with the consequences.

Osborne and Webb, of course, will never couch the argument in precisely these terms. The government’s gamble is that the vast majority of pensioners will use this new freedom responsibly, and so the policy will act as a Conservative (and perhaps Lib Dem) vote-booster, equivalent to the promise of tax cuts in the next parliament.

Yet it is very much a gamble. The majority probably will not blow their savings, but the unfortunate thing about unfettered freedom is that it opens up space for some failure.

We can guarantee that, as a result of this policy, some pensioners who otherwise might have been financially secure will suffer serious difficulty. What happens next?

If we lived in a purely rational, utilitarian society then we could expect these elderly people to face their just deserts for such apparent profligacy. But modern Britain is thankfully not this sort of society. People are not atomised agents of Osborne’s beloved neoclassical economics: rather, they are humans, parents and grandparents, actual citizens embedded in a network of personal and social relations. Faced with destitution, they will not just vanish into the ether, or hurry to the nearest soup kitchen; they will become dependent upon their families, or else upon the state, in a position of misery and helplessness.

Public opinion will simply not allow a sizable number of senior citizens to be left unsupported for their ‘twilight years’, even if they apparently ‘deserve’ it as a result of their own decisions. There are hints that MPs are not unaware of how badly wrong this policy could be, both economically (potentially causing a heftier welfare bill at some point in the future) and electorally (provoking a backlash against those who thought liberalisation was a good idea).

While politicians designed the policy, the Treasury Select Committee has effectively charged the relevant regulator, the Financial Conduct Authority (FCA), with ensuring that it doesn’t go wrong, especially with preventing over-55s being taken advantage of by the retail-finance sector. The FCA is mandated to work on these matters, yet a regulator can only be expected to operate within the bounds set by government policy. If the government creates the risk of exploitation and suffering for pensioners, the FCA can only manage that risk, not prevent the outcome entirely.

Despite the party-political scramble to appease pensioners and the middle-aged (both groups vote in disproportionate numbers compared to the rest of the population) we must not forget that these groups are subject to the same behavioural pressures of a hyperactive consumer society as everyone else. We should therefore expect them to make the same mistakes as the rest of us. Coalition politicians must be ready to pay the price for placing the burden of their unbridled short-termism upon future generations.

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