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Independent View

There will not be enough people working and paying taxes to support the Government pension promise, says Tony Byrne.

I remember reading a number of years ago that Serps, now known as S2P, was forecast to be bankrupt by 2030. In the years since then, it has become clear to me that not only will S2P be bankrupt but also the basic state pension scheme and public sector pension schemes too.

It is clear that there will not be enough people working and paying enough taxes to support people earning those lovely index-linked pensions. This is, of course, because virtually all Government pension schemes are unfunded. They are simply a Government promise.

This reminds me of the old saying of Frederic Bastiat, French economist, that: “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.”

In recent years, Serps has been downvalued twice already and the state retirement age for women has been increased from age 60 to 65. More changes are on the cards and they won’t be popular. Retirement ages will have to increase to age 70 and beyond, benefits will be reduced and individual pension contributions will have to be increased. In addition, it seems inevitable that means testing will become the norm.

The alternative is to increase taxes, of course, which the current Labour government has done a lot since 1997. The problem here is that taxes will have to rise to 100 per cent or more to meet government promises. Mind you that wouldn’t be a first for Labour. Back in the Loony Left days of the 1970s, the top rate of income tax was 98 per cent but it was possible to pay an effective rate of 103 per cent in certain circumstances. Do you think this couldn’t happen again? Don’t you believe it.

Ever since Tony Blair declared he wouldn’t increase income tax in 1997 there has been a steady and inexorable rise in the tax take for the government. Tax freedom day is now well into June each year and the percentage of GDP taken in tax increases every year. In spite of that the Chancellor is faced with a budget deficit each year and having to borrow money to balance the books. Labour’s waste of public money is on a grand scale yet somehow the party keeps getting re-elected.

Maybe that is because, as George Bernard Shaw put it, “a government which robs Peter to pay Paul can always depend on the support of Paul.”

It is forecast that there will be two working people to support every one retired person. So lets use a simple example of two working people on an average salary of 24,000, each supporting a retired civil servant on the same average salary of 24,000 after 40 years’ service as a civil servant.

Employee 1 – Tax & NIC (e’er & e’ee), say, 9,000Employee 2 – Tax & NIC(e’er & e’ee), say, 9,000Retired civil servant – Civil service pension 12,000pa + TFC 36,000Basic state pension 4,056 paAs you can see, virtually all of the tax and National Insurance contributions from the two employees pays the retired civil servant’s pension each year. Where does the money come from for other public services in this example?When Will Rogers said: “I don’t make jokes. I just watch the Government and report the facts,” clearly he knew what he was talking about. But do our nice Labour MPs know what they are talking about too? My guess is that they do know the situation but are either too scared to tell the public the truth or want to hang on to their own lucrative MPs’ index-linked pensions. My belief is that it is a combination of the two.

Unfortunately, in the world we now live in such principles as honour, courage, conviction and honesty have all but deserted our politicians. They are primarily in it for themselves. Gone are the days of such Prime Ministers as Churchill who once said: “we contend that for a nation to try to tax itself into prosperity is like a man standing in a buc-ket and trying to lift himself up by the handle”.

The blunt truth is that we need courageous politicians today, who will be honest enough to tell us that the government promises on pensions are just not going to be fulfilled.

Already in countries such as New Zealand and Australia radical changes have been brought in to tackle pension issues.

In Australia, compulsory employer pension contributions of 9 per cent of salary are paid into money-purchase staff pension schemes.

In New Zealand the system of government promise-style pensions has been completely revamped. Bold moves, unpopular no doubt, but realistic, honest and courageous changes nonetheless.

Such radical changes will inevitably occur in the UK eventually when we next get a truly courageous Prime Minister and not the imitation one we have got at the moment in Tony Blair, with his tax and spend nanny state culture of government.

Roll on the dayTony Byrne is business development director of Wealth And Tax Management

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