Sunset for pensions

No politician dares suggest that depriving a chunk of the country of its retirement prospects is a f

The biggest debate in British politics in 2010 will be how to cut the size of government. With annual borrowing heading for £178bn in this fiscal year, whoever is in charge will have to wield the axe. One obvious target for the government and opposition is proving to be retirement. The consequences of removing pensions benefits, though painful, are felt later rather than sooner. But as we saw with Gordon Brown's dividend-tax raid on private pension funds in 1997, such measures can have hugely damaging effects.

Alistair Darling's December 2009 pre-Budget report was filled with pension cluster bombs. By far the most important was the decision to postpone implementation of New Labour's landmark "personal account" pensions reform, with a saving to the state of £2.3bn by 2014-2015, making it one of the largest identified cuts. Darling insisted on the delay despite a spirited fight by the Work and Pensions Secretary, Yvette Cooper.

The impending political battle over the costs of retirement was signalled by the Conservative shadow chancellor, George Osborne, in his October 2009 "austerity" speech to the Tory party conference in Manchester. Osborne was accused of betraying the elderly and failing to think through the consequences of raising the retirement age to 66 from 2016.

But the Tories were also recognising that, for much of Labour's 13 years in office, pensions have been an issue that dare not speak its name (though it has been at the core of Labour's value system since the Attlee government steered the National Insurance Act through the Commons in 1946). Over the first decade of New Labour, differences over pensions came to symbolise divisions between Tony Blair and Brown. Blair was a long-time advocate of pensions reform. But Brown saw any efforts to fiddle with state, public- or private-sector pensions as an intrusion on his territory at the Treasury.

The result was years of stalemate, bungled decision-making and the impression that no one really cared. It was only after heated meetings at N0 10 between Brown, the then pensions secretary, John Hutton, and Blair in 2006-2007, that agreement was reached on sweeping changes to retirement provision, based on the recommendations of the Blair-appointed Pensions Commission, led by Lord (Adair) Turner.

In an effort to phase out the need for widespread means testing, state pensions would be linked again to rises in average earnings from 2012 onwards. This would be paid for by raising the state pension age to 66 from 2026 (ten years later than the Tories), 67 in 2036 and 68 in 2046. All private-sector workers would be automatically enrolled in a new, government-organised scheme of "personal accounts" (just renamed the National Employment Savings Trust), similar to others in Australia and Sweden. This should have been operational in 2012.

It was the delayed implementation, if not destruction, of these plans that Darling sneaked through in December.

Deep in debt

The need to do something about the Budget deficit is clear: for every £4 the government will spend in the next financial year it will raise just £3 in taxes. As a result, borrowing in the current financial year will surge to 65 per cent of national output, the highest figure in peacetime (with the possible exception of a short period in the 1970s).

Without sharp rises in taxation and spending cuts, borrowing could rise to 78 per cent of GDP by 2014-2015. But these numbers tell only part of the story. Britain has enormous hidden liabilities that are not included in the Budget. Among the biggest of these burdens on future generations is the nation's unfunded pensions promises to employees in the public sector.

The number of state workers has surged under Labour as more than a million people have been added to the payroll.

The last published figures show that civil ser­vice pensions liabilities climbed 40 per cent - from £84.1bn to £119.4bn - in the three years to March 2008. However, if you count the total liability across government, including the NHS and education, the figure rockets to £750bn. Local government funds alone will have a deficit of £60bn next year, according to new data collected by the Liberal Democrats. Despite this, reform of public-sector pensions is one of the great unmentionables of the political debate. So far, no politician has dared suggest that depriving a large chunk of the country of retirement prospects is a fiscal necessity.

This, however, is precisely what has been happening in business. Britain's defined-salary pension scheme, not so long ago the best funded of all those in the western democracies, has been in decline ever since Labour came to office. The retreat is a product of several factors.

In 1997, Gordon Brown, in his first Budget, abolished the tax break for dividends invested in pension funds, removing an estimated £125bn of income. Extra regulations have also hugely increased the cost of running such schemes. Pile on the additional burdens of changing mortality as people live longer, and more than a decade of turbulent stock markets - culmin­ating in 2008's crash - and the gold-standard final-salary pension becomes an unbearable weight for many companies.

Generous package

It used to be said that the baby-boomer generation - with its inflation-proofed final-salary retirement plans - was the "pensions aristocracy". That may have been the case, but the most fortunate are now in the public sector, where many are in non-contributory plans that pay out inflation-proofed pensions at the age of 60.

Generous retirement arrangements for state employees were seen as compensation for lower wages. However, during the recession, average pay in the state sector has caught up with pay by private companies. In fact, this clash of reward structures, if not addressed, could damage social cohesion and the de facto contract between taxpayer and state.

The Confederation of British Industry has been among those leading the calls for reform. The employers' group proposes that the retirement age be raised to 65 for younger state workers. More realistic employer contributions should be deployed and mortality assumptions altered in line with practice in the private sector.

The Chancellor unveiled changes, aimed at capping public-sector pensions, in December. But with estimated cost savings of just £1bn, these barely scrape the surface. At the very least, public-sector retirement ages should move in step with those for state pensions, thereby cutting back the burden for future generations of taxpayers. However, a bolder solution would be to bring future public-sector employees under the umbrella of the "personal account" system, if it gets off the ground.

There is no reason why the government, setting an example to the private sector, should not contribute more than the minimum. Unfortunately, that is not going to happen. All too often, when it comes to pensions, obfuscation and complexity are preferred to bold thinking.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 25 January 2010 issue of the New Statesman, Afghanistan: Why we cannot win this war

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.

 

 

This article first appeared in the 25 January 2010 issue of the New Statesman, Afghanistan: Why we cannot win this war