Hamish McRae: Instead of lambasting Turner, we should sink the Bismarck approach to retirement

You might think it is all Lord Turner's fault we are living longer
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Lord Turner, the Government's pensions guru, formally launches his report on what should be done about pensions this week - and already, ahead of publication on Wednesday, hostilities have been engaged.

The broad content of the review is pretty much known. The main provisions include a call for the state pension age for men and women to start at 67; for people to have an automatic savings scheme, with money deducted from their salaries; and, among other improvements to the state pension scheme, for it to be tied to earnings, not prices.

Boom! The idea that people should have to work for two years longer is being billed as unfair to manual workers vis-à-vis office workers. The CBI is opposing his idea that companies should be forced to put more into pension funds. The life assurance firms are worried that compulsory savings will cut the amount that people save of their own accord. And Socialist Worker says this is a plan "to steal your retirement and turn the clock back 50 years".

But the most serious challenge apparently comes from Gordon Brown. The papers have been full of stories about how the Treasury is trying to "sabotage" Lord Turner's report by writing to remind him that the present commitment to link the pension credit to earnings rather than prices will cease at the end of the life of this parliament.

Poor Lord Turner. You might think from the row that it is all his fault people are living longer and not saving enough for their retirement. He has every right to be cross about the hostility whipped up towards what is a perfectly sensible approach to a problem faced by the entire developed world.

Indeed, at one level it is rather a welcome problem. Hands up anyone who would seriously prefer a situation where elderly people were becoming less healthy and dying younger?

Nor is it really fair to castigate the Treasury for its supposed "meanness". No government can commit itself to paying a particular level of pensions 20 or 30 years hence - or if it does, that should be treated with great scepticism. All we can reasonable expect, surely, is honesty. It is a subjective judgement but I would suggest that the British Government's approach is more honest than that of most of its European counterparts. The UK was ranked sixth in terms of its pensions among the EU nations (and the best of the large ones) in a survey by Aon Consulting last week - thanks to somewhat more favourable demographic trends, reasonable private sector pensions and a relatively sustainable state system.

There are legitimate criticisms of Treasury policy. I would argue that the additional tax burden on private pensions imposed by Mr Brown in his first Budget now looks at best unwise and at worst disgraceful. The refusal of the Government to consider later retirement for its own employees - keeping this at 60 for existing workers - also appears deeply unfair. I am all for kicking the Chancellor, or indeed any minister, but you ought to attack them for the things they are doing wrong, not the things they are doing right.

The fundamental point here is that society has to decide the balance that it wants. To what extent does it want people to work longer? Or save more now, and make sacrifices now, in exchange for a better lifestyle in retirement? Or shift more of the burden of paying for the aged on to our children, the next generation of working people, bearing in mind that they may rebel and refuse to pay?

You can see the dilemma in the graphs. The first, using US data, shows how over time the average retirement age has risen compared to the average lifespan. If people on average die before they retire, there is no overall pensions problem.

The second has a slightly different focus, showing the scale of the problem not just for pensions but for the size of the workforce. If you take the main age group - the 25- to 44-year-olds - and look at the G7 countries as a whole, this group has reached a plateau now and will decline slowly. But if you exclude the US and look at the other six countries (Japan, Germany, the UK, France, Italy and Canada), you can see that we are facing a relentless decline in the size of this vital group.

You can get a further insight - taking total workforces in this case - in the right-hand graph. The US and Canada can expect to have rising ones, that of the UK goes up a bit, France is fairly stable, and the other three face a dramatic decline.

These figures are not Mr Brown's fault, nor Lord Turner's. We should surely welcome the point that the UK is not in quite as dire a demographic position as continental Europe. We should also be satisfied that, with the Turner report, we are at least taking the consequences for pensions seriously.

But this is not just about pensions. The report will be well crafted and sensible, drawing on what is known about good practice around the world. But the countries that cope best with the economic consequences of having ageing populations will not necessarily be the ones that cope best with pension provision. The enlightened ones will use this crisis as an opportunity to rethink the nature of work.

If you stand back and think about it, the idea that there should be a fixed retirement age for everyone is a recent one. Germany adopted it, with the age of 70, in 1889 on the instigation of Otto von Bismarck - who was 74 at the time. It is crude, making no allowance for different types of jobs, the willingness of people to carry on working, their health, their family circumstances and so on.

Indeed, the whole idea of stopping work on one particular day is artificial, for it predates all the technology that lets people scale back gradually. More than 10 per cent of the jobs in London and the South of England are teleworkers, operating from a screen at home. More than half of these people are self-employed.

A radical approach would be to try to adapt pensions, tax and other regulation to the way we work now and are likely to in the future, rather than the way we used to a century ago. This could mean that there might be no formal retirement at all, not just no specific retirement age. People would make their own choice about how fast to wind down. For some income groups, the choice to work longer would actually increase their health and life expectancy, so there would be social and human benefits as well as economic ones.

This approach would not suit everyone. There are real problems for people in lower-income groups, who tend to have worse health and who will inevitably and rightly need more support from taxpayers as a whole. Later retirement would hit them particularly hard.

But that is an argument for looking at the reasons for unequal life outcomes in general. Meanwhile, pensions have to be brought out from the shadow of a long-dead German chancellor.

Italians aren't the only ones who'll fume

Britain might be arguing about pensions, but Italy is taking industrial action about them. A brief visit to Rome on Friday coincided with a national strike, the sixth since Silvio Berlusconi became Prime Minister in April 2001. The specific issue is the budget, which includes cuts in spending, some increases in revenue and also some reduction in social security charges on employers. The aim is to save around €16.5bn (£11.3bn).

You could see this as a political challenge to the Prime Minister, who will seek re-election next April - and of course it is partly that. But it is also a reflection of minimal economic growth and the pressure that puts on national finances.

It will get worse. In the short term, Italy is on the brink of recession; in the medium term, it faces the sharpest decline in the size of its workforce of any large European country. That decline has already begun, and partly as a result of this, Italy has arguably the least sustainable public pension system in Europe.

So what we are seeing is the political unrest that stems from slow growth and a declining workforce. Whatever you think of Mr Berlusconi, though, the real problem is not the government but the financial and demographic arithmetic. The challenge to Italy is very much the same one we all face - just somewhat more serious and making itself evident somewhat earlier.

The political outcome in Italy remains to be seen but the interesting thing for all of us will be to observe how politicians across Europe prepare their electorates for the fiscal consequences of ageing societies. People entering the workforce now, unlike those now retired or about to retire, will, on average, pay more in taxation than they will receive in benefits. The state will offer its citizens a bad deal.

Italy provides an example of how angry citizens will be when they feel that has happened.

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