SocialismToday           Socialist Party magazine

Attacking public-sector pensions

New Labour’s neo-liberal drive is continuing with plans to drastically cut pension provision in the public sector. If it goes through, workers will work five more years, then receive a lower pension. The move has caused widespread anger among workers with ever-increasing rank-and-file demands for cross-union industrial action. KEN SMITH reports.

THE BLAIR GOVERNMENT’S justification for its wholesale assault on public-sector pensions is that as a society we can no longer afford to pay the sums we are currently paying ourselves in our old age because we are all living longer. So, they claim, we all have to reconcile ourselves to paying more to the state and occupational pension funds in return for working longer and getting less at the end of our working lives.

The bosses’ organisation, the CBI, claims that there is a huge pensions crisis and that we should all work at least until we are 70, implicitly because their system can no longer afford to allow workers to retire at 60 or 65. And the Turner Commission on pensions, headed by Adair Turner, former head of the CBI, has echoed that conclusion and is preparing the ground for such bitter recommendations when it issues its final report in the autumn.

As if that wasn’t enough of an indicator of how the bosses believe workers should be treated, the companies that make up the CBI, in the main, have been slashing workers’ pension entitlements in the private sector for the best part of the last decade.

There has been talk of a looming pensions ‘crisis’ for years, but if there is one then it is caused by the actions of the bosses and the government in trying to boost the profitability of the capitalist system, rather than workers living longer. British society has gone from a position of having one of the better pension provisions for workers – though socialists would argue that it was far from adequate – to a position where 11.3 million workers are not making any pension contributions at all. And, amongst people over 25, 12.1 million people are unable to save enough to enjoy a comfortable retirement.

This could lead to a situation, according to projections, where pensioners will suffer a 30% decline in relative incomes unless, the bosses claim, people increase savings, pay more taxes and accept an increase in the retirement age.

Bosses in the private sector took the option of taking ‘contributions holidays’ (taking advantage of the boom in share prices, which temporarily boosted the book value of pension fund assets) and ending ‘final-salary’ pension schemes in the 1980s and 1990s in order to boost their profitability. Through this, according to the TUC, the bosses saved themselves over £20 billion in reduced employer contributions from 1987 and increased their company profits by over £4 billion.

Now the bosses in other countries, especially Europe, and governments of the advanced capitalist countries are attempting to emulate their British counterparts. Similarly, the Blair government in Britain, despite decades of the state pension and occupational pensions falling behind the rest of Europe, plan to go further and reduce provision for those over working age to levels that existed in Britain over two centuries ago.

But the arguments of the Blair government, in common with those of other countries attacking social security and pension budgets, are based on a fundamental deceit. According to a document from the Treasury in December 2003: "The changing demographic structure of the UK’s population – especially the ageing aspect – is projected to have only a limited impact on public spending over the coming decades". (Fiscal Sustainability and the Ageing Population, page 49)

Coming on top of the projected 100,000 job cuts in the civil service, the real intention of the Labour government is the final dismantling of the post-second world war welfare state and handing over as much public-sector provision to its friends in big business as is possible. Major obstacles in its path to doing this, however, are the wages, entitlements and conditions of public-sector workers – the most densely union-organised sector of the British workforce.

Government scaremongering

NOW THE BLAIR government is outlining a long-term plan to reduce the pension entitlement of these workers – in effect, a massive pay cut, as workers view pensions as deferred wages. If they were to get away with such a huge attack then this could end any effective role of the unions in representing public-sector workers (a similar process has been seen in the private sector) and would lead to further erosion of pay and conditions as public service provision in Britain increasingly follows the US or Latin American road.

A closer look at projections of what is required to guarantee a decent income in retirement for the vast majority of the population, in comparison with the huge sums given to defence spending or subsidising big business, immediately shows how much the government is scaremongering about the figures in order to cut government spending further. One immediate aim is to overcome Gordon Brown’s financial black hole that the government faces in the years ahead.

But the fact is, even on a capitalist basis, we are very far from a big pensions crisis in Britain in terms of the wealth available in society. What is really at stake is the division of that wealth between the capitalist class and the rest of us. Also behind the attacks is a desire of British bosses (including the government) to return to pre-Victorian times in pension provision, when they had a very limited responsibility for their retired workers.

The bosses have burned their fingers with their contributions holidays, which led to serious underfunding of some private-sector pensions, especially when stock markets slumped after 2000, sharply cutting the current value of pension-fund assets – up to £65 billion, according to The Economist. Some are now being forced to make up the shortfall under pressure and threats of action from their workforces. This has forced them to top up pension funds and cut their share dividend which, in turn, has pushed the value of company shares down.

In response, the bosses have sought to end defined benefit final-salary schemes and move to defined contribution schemes, where the workers know how much they will pay but do not know how much their pension will be worth when they retire.

Even with current projected population growth and the fact that there will be fewer in the working population compared to retired dependants, the overall growth of the economy, even on the basis of the lowest level of capitalist growth projections, should be able to guarantee the current state pension provision and the current level of occupational pensions for public-sector workers (as inadequate as they generally are) for decades to come. (A major economic slump, however, or a period of prolonged economic depression, would throw investment-based pension funds into deep crisis.)

But for successive British governments pension liabilities, and those of the capitalist class, constitute a drain on their profits and the subsidies they give to big business. Consequently, they have attacked the state pension and retirement entitlements for a whole generation since the early 1980s – when Thatcher removed the link between pensions and earnings. Britain now has the lowest level of overall spending on pensions of any of the advanced capitalist countries. In the UK on average workers get 37% of their working-life earnings on retirement. But in the Netherlands workers get 70%, in Sweden 76%, and in France 71%.

Figure it out

NOW THEY INTEND to go for what they perceive as the soft underbelly of public-sector pensions to reduce state spending even further and drive workers’ expectations and conditions still lower.

One estimate is that, even on the basis of the current public-sector workforce, increasing the retirement age on a full pension by five years, which the government intends to do across the board, will reduce the government’s future pensions bill by at least £100 billion. This has been calculated on the basis that if the average public-sector occupational pension is £4,000 a year then each public-sector worker currently employed will lose £20,000 on average. For over five million public-sector workers in total this equals £100 billion.

This cut is before the other proposed government changes kick in, such as increased contributions, reducing the government’s own contributions as an employer and possibly changing to ‘career average’ pensions rather than ‘final salary’ schemes. This figure, moreover, is a gross underestimate of what the government hopes to save after 2013.

The New Labour government claims it can no longer afford to fund public-sector pensions in the ‘unlimited’ way governments have in the past. It claims that the total liability for its pensions bill amounts to over £500 billion – about half the UK’s gross domestic product (GDP). According to consultants Watson Wyatt, the government’s liabilities are over £600 billion. They say this is growing by £47 billion a year. However, some of this astronomical sum comes from changes in accountancy practise, which also pushed the liabilities of private-sector pensions up by similar amounts.

In some respects, the projections of pension liabilities for companies or government are a pseudo-scientific form of educated guesswork – where all sorts of factors from life expectancy to future stock market returns and the number of people contributing to pension funds are guestimated. For instance, in 1999, very few pension fund consultants foresaw the imminent collapse in share prices, and overestimated future returns. At that time, some of these consultants only gave a 1% chance of stocks and shares declining in the years ahead.

Another reason why the public-sector pension liability has increased in recent years is because the Labour government has taken on more workers, thus increasing its total pension liability. However, Labour has been forced to take on extra workers in the public sector after years of underfunding by Tory and Labour governments brought major public services to the point of collapse.

Inevitably, a bigger workforce means a bigger pension bill, but a bigger workforce also means more workers contributing into pension funds and National Insurance. The figure of unfunded liabilities also refers to the total bill the government would have to meet if it had to effectively pay out all its pension liabilities at once. But the government will never be called upon to do this, and has to meet these liabilities over many decades rather than all at once.

The true annual figure of how much the government has to pay out of its current expenditure for unfunded public-sector pensions is a lot less than the scaremongering headline figures quoted. It was actually only £12.6 billion in 1999, about 3% of government spending and less than 1.5% of GDP – that would mean it is currently about £15 billion a year – just under half of what the government pays out in debt repayment or defence expenditure.

Local government pension schemes, which pay out £14 billion a year, are self-funded schemes and make no claim on government finances. However, this has not stopped the government from including them in the current raft of proposed changes. In total the government only spends 5% of GDP on pensions. Yet, it is trying to claim that it cannot afford even the paltry provision it offers at the moment in the form of the state pension.

A matter of life and death

CURRENTLY, THE 5% of GDP – about £50 billion – that the government spends on state pension benefits includes the basic state pension, SERPS – or SP2, the second state pension – the minimum income guarantee and the winter fuel payment. On top of this, it pays about £15 billion a year for occupational pensions of state employees – approximately 1.5% of GDP. This makes a combined total of 6.5% of GDP spent on pensions by the state.

Other governments currently spend a higher proportion of GDP on pensions. The average among European Union countries is 10% and in OECD countries is 7.5%. (Pensions Policy Institute, Briefing Note, Number 3 July 2003)

However, the number of pensioners is projected to rise from eleven million now to 17 million by 2050 – an increase of 40%. This may sound a big increase to finance but the government plans to maintain the current state pension benefit system, whose value is constantly declining relative to incomes, to decrease what it pays out. And if the number of people in work and the economy grow at the same level as in the last 40 years then this rise in the pension age population will see the cost of providing state pension benefits only rise from 5% to 5.7% of GDP.

At current levels of GDP this would mean about an extra £700 million a year being spent. When you consider that there is a £25 billion surplus in the National Insurance fund – because state pensions have dropped so much relative to earnings in the last 20 years, a trend which the government hopes to continue – then the government could conceivably cover its extra costs for up to 30 years before it hit a crisis level.

However, the government plans to keep the amount paid out through state expenditure at the same level of 5% of GDP while the number of people of state pension age or older is expected to increase by 40%. This is bad news for those relying solely on a state pension. It means that by 2040 the value of benefits paid per pension relative to the size of the economy, according to the Pensions Policy Institute, will see each individual pensioner receiving on average a 40% smaller share of GDP than pensioners do today. So, as this trend continues, even by 2020 the basic state pension will be halved in value – worth only 10% of average earnings (no more than £56 per week) compared to the present 20%.

One aspect of its pensions policy the government does not appear to have any plans to change is the huge amount it gives in subsidies to private pensions in the form of tax concessions. Tax relief for private pensions and those who have opted out of the second state pension are now the equivalent of 2.5% of GDP. Half of that money goes to the richest 10% of taxpayers – with the top 2.5% grabbing over a quarter.

If the tax relief for the richest taxpayers was abolished, that would release at least £15 billion extra per year. If corporation tax was increased to the levels it was 30 years ago – before the Thatcherite neo-liberal counter-revolution began – then that would add another £3.5 billion to the Treasury funds each year that could be made available for pensions. Add in state expenditure on defence – over £27 billion a year – and debt interest repayment – over £24 billion a year – and throw in the £25 billion National Insurance fund surplus, then the government would have more than adequate money to cover pension liabilities and considerably raise the state pension at the very least.

Ironically, it is the poorest in society who make the least claim on their pension entitlement. A report from the Faculty and Institute of Actuaries in January 2005 showed that the size of someone’s pension can determine their life expectancy. According to its report, people on pensions of less than £4,500 a year are likely to die earlier than those with a pension of more than £13,000 a year. Now both the bosses and the government are prepared to send more workers to an early grave by cutting pension entitlements even further.

For many workers, the need to resist the attacks on pensions will clearly be a matter of life and death – and even in the best cases workers will have to work longer for less reward, both whilst in work and in retirement.

Mass united action

A SOCIALIST PENSIONS policy would use the money available from the rich and big business – as part of a socialist planned economy – to allow workers to start drawing a decent state pension at 55. Those who want to continue work after that age should be able to do so. There should also be the allowance for workers to work part time, drawing part of their pension to bridge the gap between work and retirement for those who want it.

Given the paltry level of the state pension, all pensioners should receive an immediate 50% increase, with the link between pensions and earnings being restored. In addition, pensioners, having contributed to society all their lives, should be entitled to free housing, heating, telephone and travel. These measures would cost around £15 billion a year. Again, compare this to the £27 billion a year New Labour currently spends on so-called defence or the £25 billion surplus built up from National Insurance contributions.

Even on a capitalist basis, whether or nor workers get a half-decent pension depends on the bosses and the government being forced to change their priorities under pressure from the organised working class. The occupational pensions and state pensions that were won in the past came about through workers’ struggles against the inequalities of the capitalist system and the fear of the bosses of social uprising from below – especially after the first and second world wars. But, as always under capitalism, whatever is won through struggle has to be defended, and the workers’ movement in Britain is at a crucial turning point over pensions.

The direction the employers and the government want to go in is clear. They want to make us work until we drop. Their plans must be defeated through mass, united action. British public-sector unions have threatened strike action to stop the raising of the retirement age by five years across the public sector. Even if the government were to retreat temporarily in the face of over a million workers joined in united strike action, it is clear that they and the bosses will come back for more.

Given the organic, long-term crisis of British capitalism, the bosses and government will attempt every possible short-term expedient they can to try and increase the profitability of British business – without investing or developing its manufacturing base – and to reduce state expenditure.

In the 1920s, the coal owners and the government of the day – pushed by the growing crisis, especially in coal production, the major industry of that time – tried to cut miners’ wages. Threats of industrial action in 1925 forced a retreat in the form of government subsidies, and setting up the Samuel Commission to look into miners’ wages and conditions. It eventually reported and confirmed the wage cut, leading to the general strike of 1926 in which the trade union leaders – right and left – capitulated to the bosses’ demands and abandoned the miners.

A certain parallel exists between then and now, though not completely analogous. The Turner Commission claims that in the long run the British economy can no longer afford its current level of pension provision. Whatever the short-term manoeuvres of the government in the run-up to the election, it is inevitable that a big battle is looming over pensions in Britain.

So far, the unions have under pressure adopted a more militant approach – particularly through the crucial role of Socialist Party members in unions like UNISON, the PCS civil servants union, and others. But many workers in Britain will want their union leaders to follow the even more militant example shown by workers in France and the rest of Europe to ensure that a decisive victory is won for all working-class people in this country.

The Great Pensions Robbery

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