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My Lords, your Lordships' House is scheduled to discuss pensions on Tuesday. Unfortunately, I cannot be sure to be here then, therefore I crave noble Lords' indulgence to address the topic today. I do so with some confidence because I want to consider the issue not in terms of the various technicalities debated during the passage of the recent Pensions Bill but as an aspect of general economic policy, especially fiscal policy and the promotion of economic stability. Pensions policy is also highly relevant to the diminution of poverty, referred to by my noble friend Lord Giddens a few moments ago.
"I will resist demands from wherever they come, such as on linking pensions to earnings, where this would put at risk the fiscal position today and in the long term. Such short-termism is not the best way forward . . . almost every one of our major competitors is grappling with high fiscal deficits and fast rising levels of debt. But at every point we have been able to meet our fiscal rules".
There are two ways of interpreting what the Chancellor of the Exchequer said. First, my right honourable friend may be interpreted as arguing that by not raising pensions as rapidly as earnings and so cutting state pensions in relation to average earnings, the cost to the Treasury of our ageing population is accordingly reduced. The "fiscal position" is not "put at risk" because the Treasury has less to pay out. Pensioners may be impoverished, but that is a price worth paying if fiscal stability is to be maintained. Our foolish competitors in, say, Germany, where 85 per cent of pensions are state pensions, will face the choice of huge fiscal deficits or higher taxes as their population, like ours, ages. That is one interpretation, but I do not believe that my right honourable friend meant that.
The second interpretation is more likely. It is that a balanced pensions system, underpinned by a state pension but enhanced by comprehensive private pension schemes funded from accumulated savings wisely invested, will provide security in old age, allow pensioners to benefit from the fruits of economic growth and at the same time protect the Treasury from the rising pensions commitments that could endanger the fiscal stability of countries reliant on state pensions. That, I believe, is what the Chancellor has in mind.
However, I am afraid that my right honourable friend has been seriously misled. I hope that today I can convince noble Lords of the following proposition: for any given level of pensions, the fiscal strains created by an ageing population are exactly the same whether pensions are state pensions, funded via private pension schemes, or a mixture of the two. Whether in a British-style private pensions system or a German-style state pensions system, taxes will have to rise to sustain the fiscal balance as the population ages. Before the Benches opposite become overexcited by that statement about rising taxes, I should point out that I am referring, as was my right honourable friend, to the long term—that is to say, the fiscal adjustment that will be necessary between 2030 and 2050.
It is clear that a pensioner's standard of living is sustained by a flow of goods and services, such as food, clothing, transport and medical care, and the services of capital investments such as houses to live in. There are two ways to secure that standard of living after retirement. The first is to store goods and services, like a squirrel hiding nuts. That is inefficient; indeed, for many goods and services, with the exception of housing, it is impossible. We cannot store up the medical care that we will need in 20 years' time.
So the second approach to sustaining our standard of living predominates. Living standards are secured in retirement by acquiring money, either from the state or pension funds, to purchase part of the contemporaneous flow of goods and services produced by the workforce. A vital component of the pensions problem is to ensure that retired people have sufficient money to buy what they need. That much is obvious.
However, there is a further, equally important problem. Some way or another, the working population producing the goods and services that the pensioners need must be persuaded not to consume all that they produce; otherwise, there would be nothing left over for pensioners to buy. There are two means by which goods and services are made available to pensioners: first, the working population saves, so they do not consume everything; secondly, the working population is taxed, reducing their income and preventing them consuming everything that they produce. Those are the only means by which pensioners' standard of living can be secured. The total real worth of pensions, pensioners' standard of living, is fixed by the amount saved by, or taxed away from, the working population. That is totally independent of how pensions are actually financed.
The problem that a Chancellor of the Exchequer will face in 20 or 30 years' time, whoever that person might be, is that to sustain the standard of living of a growing number of pensioners, in the absence of an historically unprecedented increase in savings rates, taxes will have to rise.
Let us consider what would happen in a British-type pensions system. We encourage people to save more for their retirement, so the population as a whole accumulates large amounts of paper assets in the form of stocks and shares in their pension funds. Come 2050, they all want to transform the money that they have accumulated into the goods and services that they need to live on, so demand in the economy rises.
If the successful policies pursued by my right honourable friend are still in place, and no Conservative government have been elected to return the economy to their tradition of boom and bust, the economy will be operating at or near full employment. So the extra demand will create inflationary pressures.
To contain those inflationary pressures the government of the day will be forced to raise taxes. The increase in taxes will have the dual effect of reducing demand to an appropriate level and, at the same time, releasing the goods and services the pensioners want to buy from the working population.
That is but one possible scenario. There are a number of different ways that things could work out, but they will all end up with the same conclusion. If the standard of living for pensioners is to be sustained, taxes will have to go up.
What then are we to make of the oft-cited solutions to the problems of an ageing population—for example, persuading people to save more and/or work longer? From what I have said already, I might have led noble Lords to believe that increased savings is an excellent means of eliminating the need for increased taxation. In the sense that increased contemporaneous savings play that crucial role of releasing resources from the working population, it is. But it is contemporaneous savings that matter; that is, savings in 30 years' time, not savings today. Indeed increased savings today could damage future pensions prospects if reduced spending resulted in slower growth and hence lower income for all in the future.
But the real problem is that increased savings today will result in a great accumulation of financial assets. As people retire they will want to cash in those assets to fund their standard of living. But who will buy them? The working population who will be saving for their retirement will be falling in numbers, so their savings will not be enough to sustain asset values. The recent report from the Pensions Commission chaired by Mr Adair Turner suggests that the,
"baby-boom effect . . . first raises asset prices by between 15–35% . . . with this effect then unwinding and then generating falling prices as the baby boom generation retires".
A fall in asset prices in excess of 35 per cent is a recipe for serious financial instability and for old-age impoverishment as pensioners, attempting to cash in their pensions, see the value of their pension funds fall. So when the noble Baroness, Lady Noakes, said at the beginning of today's debate that increased savings today are a "key part of solving the pensions problem", she was quite wrong.
The only way to avoid the unpalatable choice of higher taxes or pensioner impoverishment is to reduce the number of pensioners. Lest noble Lords take alarm, I should make it clear that I am not proposing a cull. The number of pensioners can be reduced simply by people working longer.
I am not in favour of raising the retirement age for everyone. Some of those who work in hard physical trades should retire relatively early, though perhaps they might be given the opportunity of taking up some other occupation. Far better than raising the retirement age would be to replace the whole concept. We could have a "flexible decade of retirement" in which people could choose when to retire between the ages of, say, 60 and 70. It has been estimated that if people were given the choice the average age of retirement would rise to around 67. If that happened a significant amount of the pressure on the Treasury would be reduced. Setting the flexible decade at a slightly higher level, say, 63 to 73, would reduce the pressure altogether.
That is the real answer to the Chancellor's commitment to fiscal stability. In the circumstances that we face today, with greater longevity and a falling birth rate resulting in an ageing population, fiscal responsibility points to the need for a higher average retirement age. At a time when older people are fitter and healthier than they have ever been, this is a solution that we can all rejoice in.