How and when you retire on your savings or private pension arrangements is of course entirely up to you. But the State pension should really be seen as a form of social insurance. Insurance against living longer than your savings.
When the various systems came in (Bismark in Germany, Lloyd George here, FDR in the US) the age at which you got your state payments was around and about the average age of death. For good reason too.
As a rational 20 year old (just as an example) you could expect to live a further 45 years (again, just an example). Of course you don’t really know what your lifetime earnings are going to be but you can at least make some assumptions and plan for that expected lifespan in your savings habits.
But what happens if you hit 68 and are still going? You’ve acted rationally and responsibly but now you’re skint. In comes the State pension. Insurance against outliving your savings.
However, average lifespan is now something like 78 for men. The retirement age is still 65. Far from the State pension now being social insurance it is now social assurance. It’s gone from being a payment against a risk of outliving your savings, something unlikely, to being a method of paying for something which is likely, your living past that state retirement age.
The old age pension should therefore be returned to what it originally was: that social insurance. The pension age should be set at the average lifespan. Yes, we don’t know what the average lifespan of the current cohort is, so we’ll use the cohort before. But that would mean that the state pension age rises to 78. And as lifespans continue to lengthen, it will rise further.
As Timmy points out, this is a difficult thing to do politically but it desperately needs to be done—not only to get us out of our current financial bind, but to ensure that we never get into this position again.
But, further, we need to have this attitude to all state benefits: they should be methods of social insurance, not assurance, i.e. an absolute last resort when you have no personal resources to fall back on. This is what the state safety net was intended to be when it started—to provide a method of protection for those who had no other protection.
The unintended consequences, of course, was that the universality of the National Insurance levy crowded out other suppliers of these services—most notably, as I have pointed out before, the Friendly Societies (which only covered about half the population by the time NI was introduced).
Before the introduction of NI, people bought insurance from mutuals, or kept savings or relied on families to help out. After the introduction of NI, the state became the de facto supplier of assurance, not insurance.
The result is the bloated and, quite frankly, unaffordable Welfare State that we now have.
One of the reasons that it is unaffordable, of course, is that the state is so desperately bad at spending money. And why is it so bad? Well, I used to quote the following quite frequently at the old place, so I'll resurrect it here.
It's always worth, at points like this, reminding ourselves of the four ways of spending money, as espoused by Milton Friedman and summarised by P J O'Rourke in All The Trouble In The World.
- You spend your own money buying something for yourself—you therefore try to get the best possible product for the best possible price.
- You spend someone else's money buying something for yourself—you still try to get the best possible product, but you are not so concerned about the price.
- You spend your own money buying something for someone else—you are deeply concerned about the price, but you are not nearly so worried about the quality of the product.
- You spend someone else's money buying something for someone else—in which case, who gives a shit?
The government spends under category 4, and so value for money—and, remember, that every single penny represents someone's hard work—is absolutely dismal. The general estimate, I believe, is that of every pound that goes into the Treasury, only about 30p makes it to the famous "front line services".
Or, to put it in terms of the new TPA video, whilst you may work five hours and twenty-one minutes of every day in order to pay the taxman, everything that you earn from 9am until a bit before noon is pissed up the wall.
Any monopoly is bad, and government is the biggest monopoly of all—not least because it has a monopoly on force. If you don't like Tesco's service, attitudes or prices, then you can stop shopping there; you don't even have to shop at another superstore (yet). If you don't pay your taxes, then you go to prison.
But it is worse than that, because the government is, so often, both payer and provider of services. And this is where the big mistake was made, in your humble Devil's opinion.
To bring it back to the original point (and back onto one of my hobby-horses), the government should never have introduced the National Insurance Contributions, for a few reasons:
- NI crowded out other service providers. You are a poor man and you can only afford to put away 5p a week; up until now, you have been conscientiously paying that 5p to your Friendly Society but, now that the government is taking it directly from your pay packet to pay for your NI—whether you want to use the government's service or not—you can no longer afford to pay your FS contributions.
- Those other service providers were often more efficient, more humane and more responsive.
As insurance-assurance co-operatives, Friendly Societies fulfill our desire for voluntary collectivism. As local societies, they also help to provide some cohesion to communities; many Friendly Societies provided a social function as well as an economic one.
Most societies allowed their members to choose their level of pay-in; how much was paid out was determined by numerous factors, but criteria usually included how much you had paid in, how long you had been a member and your actual need.
This last is important, for our current Welfare State is not based on need—it is based on an inhuman, box-ticking system. Learn how to play the system and you can get more than a living wage; but this system is not based on need. (The one time that I have been starving, I was unable to get any help because I was employed as a company director—the fact that the company had almost no money to pay me was irrelevant.)
As such, Friendly Societies address the issue of self-reliance too; you are responsible for ensuring that you pay in and, should you fall on hard times, your pay-out is related to what you paid in.
Friendly Societies also address the issue of fraud. People are far less likely to steal from those whom they know personally; further, knowing you personally, those people will also be able to check whether you are, in fact, stealing from them. And this applies, of course, not only to benefit claimants but also to those running the Society.
- NI placed the state not only in loco parentis, but in place of people's responsibility to themselves and to others.
- The funds were misappropriated and, instead of forming a genuine insurance fund, the government simply amalgamated the insurance contributions into general spending. In practical terms, you have no National Insurance Fund of your own; your needs are paid for out of general taxation.
But we cannot deny that NI was introduced to deal with genuine problems: first, that the Friendly Societies (though growing rapidly) simply didn't cover all of the population and, second, that some people simply could not afford even 5p a week.
Now, in theory, NI does not address the latter problem at all, since you were supposed to pay in before you could get any money out. NI did address the first problem but at the expense of destroying other providers who were doing the job better.
So, what should the government have done?
The first thing would have been to encourage faster growth of Friendly Societies and other assurance mutuals through tax breaks and other such schemes.
The second would be to provide a temporary state social insurance fund in areas without a Friendly Society, run by local workers, with an aim to signing this over to the fund owners once properly up and running. In other words, the government would provide a financial incentive to start new Friendly Societies. This could have been paid for, initially, by slightly increasing general taxation on the rich (if necessary—these funds should swiftly become self-sustaining).
The third would be to continue to encourage charities and other aid organisations to address the need to help those who—in not earning at all—were unable to benefit from either Friendly Societies or NI provision.
For what it is worth, and at a very high-level, this would be my preferred way of addressing the Welfare State reforms that we so desperately need right now. Whether we should force workers (and employers) to pay a certain percentage of their wages into a Friendly Society (for yes, there must be competition)—or not is one point of debate, and I am sure that there are others.
However, at the end of it, we would have a more efficient system and, I believe, a better, more humane one too.