Current affairs: The future's not so bright for all
The Pensions Bill debate in the House of Lords last week picked over the oh so thorny issue of how auto-enrolled pension savings can be eroded in value, or even rendered completely valueless, through interaction with our system of means-tested support for the elderly.
The argument is, of course, circular. There is no way to know in advance whether any given individual, of say 20 years of age, will end up on means- tested support in their old age. In the same way no one can say with certainty whether any particular 20-year-old will even live long enough to reach old age. The future cannot be known for any individual. But we can have reasonable expectations of what the future holds for cohorts of people. We wouldn't expect all 20-year-olds today to die before they reach the age of 68, for example. But we should have a reasonably good idea of the number of pensioner households that are likely to be in receipt of means-tested support in those far-off days many decades hence.
The government has agreed to go away and crunch these numbers by the end of this year so that we can have a better idea of how many people are likely to lose some value from their soon-to-be auto-enrolled savings if the proposals in the current Pensions Bill go ahead from 2012. Clearly some people will lose out, but the hope is that it won't be many people and that will mean it's OK to go ahead with the plans. After all, you can't make an omelette without breaking a few eggs can you?
But where will the line be drawn? How few people have to potentially lose out before we think it's acceptable, or at least politically expedient, to invoke inertia-selling practices through auto-enrolment in pension schemes to get people saving? The figure of 10% was bandied about in the Lords' debate. One in 10. But that seems an impossibly low figure unless the Department for Work and Pensions statistics issued thus far are completely wrong.
Today, 25% of pensioners draw housing benefit and 30% or more draw council tax benefit, just two of the many means-tested entitlements available, and ones that are hard to imagine falling dramatically. The projections for the number of pensioner households that will be in receipt of means-tested entitlements on figures published so far look worryingly high. Even after the current reforms go through, the figure for 2020 may be a staggering 55% and may still be as high as 40% by 2050. That seems to indicate, to me at least, that we will be asking far too many people to sacrifice the value of their savings 'for the greater good'.
We may not know in advance exactly who those who will lose out are, but we do know that it will be a high number of future pensioners. That surely should lead us to conclude that it isn't auto-enrolment into an imperfect system we need to be spending our time and effort on these days, but rather a fundamental review of the underlying system itself.
First published in Pensions Week, 7 July 2008