Brown's pension plan is just a patch over an old problem

By Hamish McRae

The Chancellor may have won political points, but at the cost of greater troubles in the future

The Chancellor may have won political points, but at the cost of greater troubles in the future

The Great Pensioner Revolt of 2000 will reverberate for many years to come. Gordon Brown's reshaping this week of public sector pensions will dog governments of all political colours for a generation.

Something had to be done. Britain was until Wednesday's pre-Budget statement the only major developed country in the world without a serious projected deficit on social security. The graph shows some IMF staff projections of these deficits for major countries through the next 50 years. Should we worry about what will happen in 2050? Absolutely, for that will be when the 20-something-year-olds - who have to fund our society over the next 40 years - will themselves be drawing their pensions. How do you say to 20-year-olds that they are going to have to pay vastly more in taxation than they will ever hope to get out in public services and pensions?

As you can see, on those projections, the UK does not have a funding problem, Sweden and the US have a manageable one and everyone else faces a catastrophe. Since those projections were made, Germany has introduced some increases in funding (using an additional payment on petrol, as it happens, to fund the shortfall) and the US has been considering privatising part of its public pensions system. Indeed when you see a graph like that, showing deficits of four times GDP, you know they cannot happen. Something has to give.

But our projections were unrealistic too, because the calculation upon which they were based, that pensions would continue to be linked to prices rather than earnings, was politically unsustainable in the long run. What we did not know until this autumn was that the long run is upon us now.

To what extent do the concessions announced by Gordon Brown and detailed further yesterday by Alistair Darling and officials change this picture? We simply don't know.

Think of the variables. If the Chancellor had simply re-linked pensions to earnings it would have been reasonably easy to do the sums. My guess is that we would have been in much the same position as Canada - we face a slightly less adverse demographic trend than Japan, Italy and Germany and the proportion of our workforce remaining in some form of employment is higher than that of France. So we would be in a mess, but not as serious a mess as the big continental European countries.

But the Chancellor did not restore the link. Instead he did a patch, upgrading the incomes of people at the bottom end of the scale (actually by more than the growth in earnings) but holding back the growth of pensions of people higher up the scale. On the face of it, that must be cheaper than re-establishing the link with earnings. But we don't know to what extent to which there will have to be further patches in the years to come; nor can we know the extent to which a new ratchet has been put in place, whereby the poorest pensions will have their pensions linked to earnings for ever and a day.

In fact the pressure will be greater than that. The Tories have already declared that they would have done better for pensioners than Labour. So a bidding war has begun for the oldies' votes. In future elections each party will be offering cheques in the post on Monday, as did Gordon Brown. As the grey vote grows, this war will become one of the key battlegrounds of politics.

So you simply cannot do the actuarial calculation that social security funding will have a specific deficit. All we can say is that the deficit will be larger than it otherwise would have been, maybe much larger.

This will have two obvious effects. The first will be that higher earners will increasingly assume, as many do at the moment, that they are on their own. Any available funds will be directed towards improving the living standards of the poor. Any residual notion that National Insurance has anything for the middle or higher-income people will be for the birds.

The second effect will be to convince not just higher earners that they have to save for their old age, but anyone on close to average earnings. There will also be pressure for people to be allowed to invest for their own retirement, rather than hand over investment funds to the state. This pressure will become particularly strong if George W Bush does eventually win and US citizens are allowed to do this sort of opt out.

In other words, the Chancellor has opened up two hitherto relatively quiescent political problem zones: the pressure from pensioners to restore the link with earnings and the pressure from higher earners to invest for their own future, rather than give their money to the state. Of course everyone accepts the need for redistribution; but until now it has been possible to redistribute to poorer pensions by stealth. Now it is out in the open.

What next? In narrow political terms the Chancellor may have won some points, but at the cost of greater problems for the future. But that is only on the face of it. The dynamics are complicated because what he has done undermines the notion of universal provision. If higher earners are being encouraged to opt out on pensions, will not they also feel encouraged to opt out on health, education and other universal public services?

And - a point defenders of universal services always make - does that not undermine the legitimacy of taxation itself? Maybe Gordon Brown has inadvertently given an enormous push towards private sector welfare provision.

We will see. Maybe the real question is how explicit should redistribution be? The past half-century has seen politicians trying to conceal the element of redistribution, by claiming that state benefits are for all. Maybe as information improves and the demographic pressures increase it would be better to make redistribution more explicit. Then people would know what they were really buying with their taxes. Maybe that is the course upon which this government has set the country.