Wednesday, February 16, 2011

How do you fancy an 8% rise in National Insurance?

For some years now, your humble Devil has been pointing out that National Insurance is a colossal, £110 billion per annum Ponzi scheme: there is no NI fund, and old "investors" are paid from the funds of new subscribers.

Of course, many Ponzi schemes are able to carry on for many years—the scam run by Charlie himself continued quite successfully for a time, as did Bernie Madoff's. The trouble is that these frauds always collapse eventually (otherwise no one would bother prosecuting the fraudsters): eventually, there are simply too many old subscribers and too few new ones.

In the UK, the NICs Ponzi scheme is creaking partly because the birth rate has been rather below the replacement rate for a few decades now: put simply, there are too many old subscribers and too few new ones.

Further, with medical costs and life expectancies soaring (this latter unaccompanied by longer pay-in times) the old subscribers are demanding ever greater pay-outs.

With more and more of those who should be new subscribers actually being beneficiaries of the scheme—I refer, of course, to the large numbers of working age people in receipt of benefits—the whole edifice has become unsustainable.

In other words, whilst National Insurance is supposed to cover unemployment benefit, your health treatment and your pension, there simply isn't enough money in the kitty. Although actually, as I said, there never was a kitty, just the income from new subscribers.

This is why the government has, for some years now, been mooting a number of ideas that would reduce the required payouts. These "solutions" generally fall into two categories: those that will save money and those that will rake money in.

Obviously, the idea that one should deny treatment to those whose lifestyles the government doesn't like falls into the money-saving category, whilst those schemes that will force people pay yet more for their old age care or for their pension fall into the money-grabbing category.

Obviously, all of the above examples mean that the government has made promises that it cannot keep; and, whilst the venal bastards who rule us insist that we abide by the "social contract", they are merrily refusing to keep their side of the bargain.

And I am afraid, despite all of the thousands of words that I have written about this subject, that your humble Devil took his eye off the ball because I had not realised that at least one of these schemes has now been made law. Yes, indeed—starting from next year, we are all going to have to start paying into a compulsory pension scheme.

(Well, I say "all"—but, of course, it only applies to those who have jobs. People who have never worked in their lives can continue merrily to pay fuck all.)
The Pensions Regulator has just issued a reminder (PDF) that all employers will have to provide a pension arrangement to all employees, beginning in October of 2012 on a widening basis until 2016. This requirement calls for a minimum total contribution to an approved pension scheme of 8% of salary, of which at least 3% must be contributed by the employer and the rest by the employee. Employers may choose to introduce a more generous scheme if they wish but the 8%/3% is the minimum requirement.

Alright, so I exaggerated slightly in the headline: the employee will only pay a minimum of 5% into this "approved" pension scheme. However, anyone who thinks that the 3% employers' contribution (plus the costs of administering the scheme, of course) will not adversely affect wages is a total idiot.

Of course, the whole thing seems so sensible—yes, we do need to save for our retirement and, yes, too few people save anywhere near enough (especially when they are younger). And yet...

This is, effectively, the government admitting that it is unable to meet its pension obligations despite already taking 11% from the employee and 12.8% from the employer—money that is supposed to cover these obligations.

Plus, the government is also adding 1% to each set of contributions for 2011–2012: that is, you will pay 12% of your salary and your employer 13.8%.

Let's try to put some figures on this, shall we?

In 2010, the median wage for a full-time employee was £499 per week = £25,948 per annum.

In 2010, the total tax taken (directly) on that median wage of £25,948 was...
£3,894.60 Income Tax + £2,225.08 Employee NICs + £2,589.18 Employer NICs = £8,708.86 (NICs total = 4,814.26)

Now, let's try and work out the cost with the new figures (I don't have a fancy website to do the figures for me, so I'll try to show my workings)...
Income Tax: (£25,948 - £7,475 PTA) × 0.2 = £3,694.60

Employees NICS: (£25,948 - (52 × £110)) × 0.12 = £2,427.36

Employers NICs: (£25,948 - (52 × £110)) × 0.138 = £2,791.46

Total tax take on median wage of £25,948 = £8,913.42 (of which NICs = £5,218.82)

[Trying to match up the NICs figures to the ones given on the ListenToTaxman site, I would say that the above are a little high—but I have no idea why. I followed HMRC's advice for the above.] Fixed. Thanks to Adam Schlumberger in the comments.

Now, this seems like a substantial proportion of anyone's wages: and, please remember, that NICs is supposed to pay for healthcare, unemployment benefit and a liveable state pension.

+++ UPDATE +++
Although the end figure for 2011–2012 is only £200 higher than that for 2010–2011, it's worth noting how the distribution has changed between Income Tax and NICs. Whilst Income Tax has dropped by £200, NICs has increased by £400—and that split roughly 1:1 between employee and employer.

This has allowed Nick Clegg, for instance, to put out a good press story about raising the Personal Tax Allowance whilst, in fact, the £200 is clawed back in National Insurance. In the meantime, the employer is saddled with a further £200 rise but, in terms of sheer numbers of votes (if you know what I mean) there aren't as many employers as there are employees, eh?
+++ UPDATE +++

And yet successive governments have pissed our money up the wall with such abandon that they now feel the need to force us all to pay another 8% of our salaries into a private pension scheme. Why? Because the government knows that, in a few years, it will not be able to afford to provide a state pension at all.

The government is going to keep our money, of course: there will be no rebate because it cannot deliver the service that it promised. No, the solution is simply to force us all to pay more. And more. And more.

How lucky we all are.
In practice, the impact will fall mostly on the lower paid since larger companies already have pension arrangements that meet minimum requirements. The greatest impact will be on the smallest companies like local traders where salaries are lower or on companies using a fluctuating workforce like restaurant chains where, again, the salaries are lower.

For employees of such companies, this pension requirement will mean an immediate cut in take-home pay of 5% if the employer chooses the minimum 3% contribution for itself. To be sure, the employee doesn’t “lose” that money; it’s just not available until retirement.

Oh joy. The Adam Smith Institute carries on its assessment...
We’ve already warned here of the dangers from government meddling in NEST, a cheap’n’cheerful pension scheme being set up by the government for those companies who can’t be bothered to set up their own. The 8%/3% rule will also be vulnerable to political manipulation by successive Chancellors, just like NI has been.

Yes, of course it will. And, of course, as soon as a big pension fund goes bust, then the government will insist that—in fact—it would be far safer if we all just paid that extra money to the state. You know, for safekeeping.
Britain, like all modern economies, must significantly increase retirement savings so, on the surface, a mandatory regime may seem justified. However, compulsion seldom delivers the desired result. After all, wasn’t the original National Insurance scheme supposed to deliver a proper pension?

Yes. Yes, it was. And what happened? That's right: the government pinched the money and spent it on shiny baubles—or, more likely, bribing its client state in time-honoured fashion.

Once again, politicians have proved that the only interests that they serve is their own; although, of course, they do also serve to prove the point that governments do everything very badly—if not actively fraudulently—and, as such, they should do as little as possible.

Leave aside Gordon Brown's profligacy! This country is suffering the effects of many, many decades of financial mismanagement, utter incompetence and outright fraud.

And, as usual, it is the productive members of society who have to pick up the slack and work even harder so that they can pay through the nose—so that benefits (that the productive themselves are not entitled to) can be doled out to the indolent, the corrupt and the rent-seeking.

Across the entirety of Western civilisation, social democracy is bankrupt—financially and morally. This cannot go on.

It is time to look to the past to find the answers for the future.


Adam Price said...

I believe the reason your figures are high is because Employees National Insurance is only on income above £110 per week. So there is a effective allowance of ~£5500 p.a.

john b said...

Hang on. Surely this only works if you think NI is something other than another word for 'extra income tax', and state pensions are something other than another word for 'benefits for people who can't work'.

Since state pensions were *always* paid out of current revenue, there was *never* a state pension fund, and this was always obviously and transparently the case (unlike Ponzi schemes, which are based on a lie about how the proprietor can generate amazing returns), this would be a ridiculous thing for anyone to believe.

NI is tax; state pensions are benefits. That is all. And anyone under the age of 40 who ever thought they were going to see a penny of state pension (unless unlucky enough to be so desperately poor in retirement as to qualify for income support) was daft to start with.

The new scheme is completely different - it's equivalent to the schemes that already exist in Australia and Singapore, and which work well.

john b said...

One thing which is true, though: now that the farce that NI is an insurance scheme and not a tax is over, it should be abolished and rolled into the income tax system - thereby both saving administration expenses and making it completely transparent to people how much tax they're paying.

If I were The Coalition, I'd take this opportunity to do it - although seeing their official tax rate rise by about 10% would doubtless upset people, I'd've thought a big enough PR campaign to make clear that the total tax paid would be the same, and that the change reflects Dishonest Labour Lies about Hidden Stealth Taxes would work in their favour.

(yes, of course the truth is Dishonest Both Sides Lies about Hidden Stealth Taxes, but that's of no consequence to anybody...)

Roger Thornhill said...

Anyone in the Private Sector producing a product called "National Insurance" that was a de facto Ponzi scheme would be imprisoned for misrepresentation.

Surely those in government were not blind to the fact they should have modelled future populations. Did they not think that life expectancy would rise while fertility lowered? What did they think, we would produce more kids yet the average working man still die at 68?

The Coalition, if it had a shred of decency and/or a fibre of Toryism left, should have taken this as a chance to explode the socialist myth, the State cares for you canard. It should come clean and say the Welfare State was bankrupt the day it was founded.

The real issue is how to solve this problem. Ok, so you force people to save, but into what? I hope none of these "approved" schemes are going to be linked to the employer. I hope we do not see stupid approval terms so a small number of players exist that just trundle along knowing that eventually it will collapse and the State steps in to pick up the tab.

Seeing as a pension system cannot do anything other than bind successors, I do not see how Parliament is authorised to decide upon it anyway. That is my preferred stance - Parliament does not have the authority.

PJH said...

"Yes, indeed—starting from next year, we are all going to have to start paying into a compulsory pension scheme."

No you're not.

You can opt out of NEST. (Or BIRDIE, or BOLLOCKS, or whatever they're calling it this week.)

It won't be easy by any means, I'm sure, but it is "entirely optional" in that it relies on lethargy and ignorance for the participation of the proles.

Weekend Yachtsman said...

"To be sure, the employee doesn’t “lose” that money; it’s just not available until retirement."


By which time it'll be worth, what - about 5p for every £1 you put in?

There was a time when clipping the coinage was a capital offence...

Lord Blagger said...

There is another way at looking at NI and the state pension system.

It's asking the question, what would your pension have been if you had invested your NI (or the current rate of NI), into the FTSE.

So, lets take a hypothetical median worker who retired at the end of 2009. They would have been on 25,000 a year.

So we go back using average wages to work out what 25K was when they were 18. We the take the current NI percentage associated with their job, and apply it in each year. Invest in the FTSE, and calculate the return including a dividend yield.

At 65 we then use the fund to buy an RPI linked joint life annuity. The most expensive going possible, which makes the income lower.

What do we find?

Instead of 5,000 a year, linked to CPI, not RPI, and not even a full joint life of the state pension, they would have been on over 20K a year.

The state pension is a rip off pure and simple.

Calculations and references above.

So, the risk is with going with the state.

If we work back until

Patrick said...

I'd like to point a logical fallacy Devil.. I never signed that 'social contract'.. ;)

Anonymous said...

I work as a group pension consultant, and the cost issue may put some of my firms under, but plenty are coping well. Those which are state funded charities, that is, most of these have been paying 5% non-contributory and well beyond for many years.

PJH said...

"state funded charities"

That's an oxymoron. They're either state funded, or they're charities. They can't be both.

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