The Pensions Crisis

Last year’s plummeting share prices have caused thousands of people to be deprived of all or part of the occupational pensions they expected to receive on retirement. This, among other things, has caused the government to set up under Adair Turner, former CBI chief, a commission to investigate the pensions situation and to come up with proposals as to how it should be handled.

Pension provision under capitalism

The essence of a pension is the allocation of a part of national income to people who are unproductive – who have ceased to be of any use to the bourgeoisie, as they have ceased to be able to serve it, much less to enhance its wealth. Yet every penny paid in pensions, just as every penny spent on wages and on the social wage (hospitals, schools, benefits, etc), spells a reduction in that part of the national income which enures to the bourgeoisie in profits.

If under capitalism there is one thing worse than being exploited, it is, being working class, not to be exploited – for if you are not a present or future wage worker, the ruling class has even less interest in your well-being than it does for that of the working class in general. This is what explains the fact that in capitalist countries the old are on average much worse off than the working population.

We are all aware that this is certainly the case in Britain, but it will do no harm to give some more specific references:

In 2001/2, 2.2 million pensioners, i.e., one in every five of all older people in Britain, were living below the poverty line (which was in 1999-2000 set at £81 a week after deducting tax and housing costs).

The current level of the basic state pension (until April 2005) is £79.60 a week for a single pensioner and £127.25 a week for a couple. 41% of pensioners do not have an occupational pension. Since the index linking of the basic state pension to average earnings was abolished in 1980, its value has fallen by more than £30 a week for an individual and £50 a week for a couple. 70% of older households do not have central heating and figures show that in 2002, 22,000 pensioners died of cold-related illnesses.

In a socialist society, the wealth produced by those who work is, after making provision for maintaining and expanding production, setting aside for a reserve and insurance fund against disasters and interruptions, administrative costs, for social needs such as schools, clinics, infrastructure, etc. and a fund for those who cannot work, distributed in various ways among all citizens, either through wages or pensions, and the greater the wealth produced, the greater the amount that can be distributed among the population. Entitlement to a pension is in no way linked to savings, and cannot be regarded as “deferred pay”. Instead, society makes provision for all its members as best as it is able.

Under capitalism, however, the wealth produced by society is appropriated by the ruling class – the bourgeoisie. It is not distributed among everybody.

To the extent the bourgeoisie allows any of that wealth to reach the working class, it is only insofar as it needs their services – after all, without the working class there would be no wealth for the bourgeoisie to appropriate! It cannot therefore allow the working class to starve en masse. The principal mechanism through which the bourgeoisie allocates part of social production to the working class is through wages, wages being on average what it costs to reproduce the worker as a worker. The bourgeoisie also, through the taxation system, allocates resources to the government for various social purposes (“the social wage”), including the provision of an income for the unwaged. A constant struggle goes on, however, whereby the bourgeoisie seeks to reduce the share of the working class, including even the salaried middle class, in order to boost its profits. Part of this struggle is to tell workers they should save for their pensions from their wages, which in effect amounts to taking a wage cut. Traditionally the British working class has put up a great deal less resistance to the slashing of the social wage than it has to cuts in the wage packet. For resisting the latter it has developed trade union organisations, such as they are, but for resisting the reduction of the social wage there are no effective organisations at all.

As the state pension is part of the social wage, its level has not tended to be as strenuously defended as it needed to be. It is therefore now so low that people who are solely dependent on it are condemned to abject poverty and death through cold and/or poor nutrition.

However, in other countries which have traditionally put less emphasis on workers saving for their pensions, the situation of workers is better. As Chris Giles pointed out in the Financial Times of 13 October, “the UK has long been known to have one of the least generous state pension systems of leading countries.” Nicholas Timmins in the Financial Times of 9/10 October (‘From complacency to crisis’) noted that “At the time Labour came to power in 1997 public spending on pensions was set to run at only about 5.5 per cent of national income until 2050. That compared with spending on pensions that was set to rise to 15 to 20 per cent or more of gross domestic product in the rest of Europe over the same period.” In Britain, however, the system that has evolved enables the bourgeoisie altogether to avoid providing adequately for a large proportion of the elderly and therefore gives the British bourgeoisie a larger share of national income.

The way this is done is by ensuring that a great deal of old-age provision was made from wages through employers setting up compulsory savings schemes, either through company schemes or through insurance companies, that would on retirement provide a pension equal to a proportion of final salary which would be smaller or greater depending on the number of years worked. These pension schemes, of course, were largely confined to better-paid workers as the low paid needed all of their wages to meet the day-to-day cost of survival.

The widespread use of contributory pension schemes enabled the bourgeoisie to keep the state pension to a minimum. Of course, the higher wages that had to be paid to enable workers to contribute to such schemes also reduced the bourgeoisie’s profits, but there were compensations. British finance multinationals and large corporate employers are able to make tidy profits from setting up compulsory and voluntary schemes which, as a bonus, put savers’ moneys at their disposal for many years. The providers make money both in administration charges and in paying a far lower return than what they are earning by investing the money saved. The directors in control of corporate pension schemes are also able to use the wealth they represent to help in achieving corporate aims.

Meanwhile by making the state pension, too, contributory in form – with entitlement dependent on having made sufficient national insurance contributions during one’s working life – even the beggarly state pension can be refused to people, especially women who were housewives all their lives and never made national insurance contributions. Of course, the government does from the social-wage fund provide an income to those of the elderly who have insufficient pension entitlement (no fewer than 5.5 million of them), but it only does so in cases where the pensioner in question ‘needs’ that support, i.e., has no savings and/or pays rent because he or she does not own their own home, and is able to overcome the mountain of intrusive and humiliating obstacles that are involve in the means-testing needed to establish entitlement.

Causes of the pensions crisis

The collapse of stock market prices last year, however, brought home the essential vulnerability of pension plans based on “savings”, just as it left many retired people who had been saving diligently all their lives bereft of the pensions to which they had thought they would be entitled. If pensions are to depend on people’s savings, then even if they could afford to save, say, 25% of their salary and did so, this would not guarantee them a good pension. There are thousands of pensioners who did save large sums of money for years, via various corporate pension schemes, but lost everything when the company which employed them collapsed. In the case of Maersk, and following them several other companies, the company wound up its pension scheme even without having become insolvent! Even workers who put money into insurance policies to provide for their retirement are in danger of losing everything if the insurance company in question collapses financially as a result of a downturn in the investment market. Other workers will have lost thousands as a result of inflation. There is no such thing as a safe investment, yet savings have by definition to be invested until they are drawn on.

Occupational schemes, moreover, quite apart from collapsing in large numbers because of employer insolvency, are ceasing to be available to new employees. This is because companies, desperate to boost their profitability in order to avoid going out of business in the current situation of escalating world economic crisis, are anxious to reduce the need to pay pensions. If they reduce their liability to pay pensions, they can keep prices down and perhaps survive.

Martin Wolf in the Financial Times of 17 March 2003 exposed the fact that there are “as many as 8.8m members of 12,606 occupational defined-benefit schemes. Given the scale of pension funding shortfalls now being reported, many will be concerned about their security in retirement. They are right to be so. The drawbacks of their involuntary bet on equity markets are becoming depressingly visible.”

He goes on to say: “For sponsors, pensions are deferred pay. Providing this is valuable to them only to the extent that it locks in their more valuable employees. Beyond that companies have next to no interest in the security in retirement of their employees. Their interest is in providing a scheme that maximises their own rewards, minimises cost and provides undiluted discretion.

“Now that the obligations are becoming onerous, providers are beginning to walk away. According to the NAPF, 30 per cent of schemes are now closed to new members.”

This closure has made the chances of the schemes being closed down as a result of insolvency even greater, for as Martin Wolf continues:

“… Since most of the costs to providers are created not by new members but by those close to, or in, retirement, this can be no more than a provisional step. It is also one that makes schemes still riskier to beneficiaries, because an ageing membership becomes increasingly dependent on uncertain investment returns [rather than the contributions of new members] and the good will and solvency of companies decreasingly interested in them.”

He goes on to point out that since pensions are deferred pay, failure to pay, or even steps which make the pension fund riskier for its beneficiaries, amount to a hidden pay cut.

Under the Pensions Act which became law in November 2004 the government has intervened to set up a fund to compensate those whose company pension schemes become insolvent for up to 90% of what they lose in pension provision as a result. This, however, is not available to those who have already lost their pensions, and it seems it will also be necessary for the company in question actually to have become insolvent, not where companies have defaulted on their pension schemes in order to avoid insolvency. The Act will apply only to final salary schemes and is likely to have the effect of accelerating the rate at which companies close such schemes to new employees.

But if the occupational defined-benefit schemes are becoming both rarer and more risky, all other schemes, which do not even attempt to set a minimum level of pension, are riskier still. Not only do the company pension schemes that have replaced former defined-benefit schemes carry no guarantee of any minimum level of pension, but in addition employers are contributing far less to them. Nicholas Timmins (op.cit.) says that:

“As they close, employers and employees are putting far less cash into the money purchase – some 6 to 11 per cent of earnings against 15 to 20 per cent and more that goes into final salary schemes.” Clearly if less is paid in, less will be available to be paid out.

Pensions savings are also susceptible to fraud. Everybody remembers how Robert Maxwell helped himself to the pension fund of Daily Mirror employees, leaving thousands of ex-Mirror employees without their contributory pension, facing a retirement of total destitution with nothing but the state provision to support them. Nicholas Timmins in the Financial Times of October 9/10 2004 also recalls that large numbers of outwardly respectable insurance companies were involved during the 1990’s in mis-selling of personal pensions with the result that “millions of people were wrongly persuaded to leave good company and public sector schemes for personal pensions that would never deliver the equivalent benefit. …”

He might also have mentioned the ‘pension contribution holidays’ that companies awarded themselves when as a result of soaring stock market prices, they decided that the pension funds they controlled had more money than they needed. As yet none of the companies which did this have been charged with fraud – they were, it seems, entitled to assume that the value of stocks and shares could only ever rise and to help themselves to any surpluses generated by their corporate pension funds, while being entitled when stocks duly fell in price to declare the schemes insolvent and wind them up without paying pensioners anything.

Anyway, such was the chaos in the pensions industry that the government commissioned a Report, the Turner Report, whose findings were published on 13 October. The facts brought to light by Turner are alarming, to say the least. The Turner Report considered that as a result of 12 million workers over the age of 25 “not saving enough”, the average pensioner will be a third worse off in 30 years in real terms, unless taxes rise, savings increase or they work longer! There is a shortfall of £57 billion a year in what is needed to maintain pension provision at their present level – inadequate though that is for the very many who have no contributory pension.

The rising proportion of the elderly

The blame for this is not being laid on any of the factors mentioned above, but on the fact that the number of the elderly is increasing. If in 2004 there are 10.8 million people in Britain over pensionable age, this number is forecast to rise to 12.2 million by 2020, thus making the cost of providing for the elderly that much higher. By 2050, it is calculated that there will be two pensioners for each person in work. Meanwhile the government has all along been planning to reduce the proportion of GDP it spends on pensions by more than 20%!

It does not, however, follow that just because the proportion of elderly in the population is increasing that the proportion of the unproductive to the productive workers in society is increasing too. One would have to consider also what proportion of society were too young to work (this number would appear to be decreasing), the numbers of the disabled and unemployed, as well as those employed in jobs that do not create wealth (e.g., teachers and the police). Secondly, even if the proportion of the unproductive vis-à-vis productive workers were increasing, since every productive worker produces values many times greater than those needed to support himself and his family, the number of pensioners would have to increase exponentially before there would be an absolute shortage of resources to meet society’s needs.

The fact of the matter is that it is only the bourgeoisie’s unwillingness to disgorge the wealth that it has appropriated that causes a problem. This wealth is dissipated in speculation, squandered on wars and in the destruction of productive forces, not to speak of the idle capacity owing to the normally-occurring periodic crises of overproduction – all matters of immense interest to the bourgeoisie – but massive resistance is put up against putting any single penny at the disposal of working class people.

Turner Report solutions

It is no surprise then that the Turner Report only has suggestions as to how the pensions crisis could be perhaps alleviated at the expense of the working class – there are naturally no suggestions that the bourgeoisie will have to take a cut in its profits. Under capitalism such a suggestion would be absurd in the extreme since capitalism cannot survive without maximum profits. Thus the Turner Report can only suggest:

That state spending on pensions would have to rise from 6.1% of GDP to 11.3%, which, if paid for from taxes, would require an increase of 19p in the £; on the basic rate. (There is, of course, no suggestion that it should be paid for by, say, higher rate taxes on incomes over £100,000 per annum. And much less is there any suggestion that it could be paid for by higher taxes on the unearned income of the bourgeoisie!).

For pension savings to double as compared to their present level or

To raise retirement age for men to 70 and women to 67.

Otherwise pensioners could simply be left to become poorer still.

()All the facts and figures mustered by the bourgeoisie are designed to prove that it is far too expensive to give pensioners a decent pension – that people need to save more for their old age and if they fail to do so then it is their own fault if they spend their retirement years in penury. Yet we have seen that the present pensions crisis has largely arisen because people have been robbed of their savings, not that they haven’t made any! The government is now reading the riot act to employers and telling them that if they are not able to ensure that their employees make adequate contributions to pension schemes, then it is possible the government will make retirement savings compulsory. But how can the government force people to save when their earnings are scarcely sufficient to live on? This all remains to be seen.

The later retirement option

The idea that working longer is any kind of cure within capitalism is ludicrous. When there is mass unemployment, how can it help to put millions of pensioners on the labour market? In individual cases, no doubt many pensioners will through working be able to make a living for longer. Maybe if the Turner commission’s suggestion that they could work part time and collect part of their pension as well would be very acceptable to many. But these older workers, assuming they are able to find work, will displace younger workers who will then be on benefits (assuming these continue to exist). In a socialist society, the more that society produces the more there is to distribute to offer its members a better life. Capitalist society simply does not work that way. A larger pool of labour means greater competition for jobs and hence lower wages. If capitalism at present is suffering a crisis of overproduction, where it cannot sell all that is produced and is therefore forced for economic reasons to close down production lines, how is it possible that a solution to the pensions crisis could lie in putting pensioners to work until they are 70? Even for the bourgeoisie this is a complete non-starter. What it really means is that the bourgeoisie is toying with the idea of not letting people have a pension until they are 70, regardless of whether they work or not. The pension, however, is so paltry that there is little to be gained from denying it to people – the alternative is to pay them benefits which may well be higher.

The only way that the bourgeoisie can gain from this is at the expense of the middle class elderly who will be forced to draw on their savings and sell their houses to free up cash to support themselves in the years between ceasing work and their pension entitlement coming to fruition, thereby ending up as destitute as working class pensioners. It is not for nothing that Steve Webb, the LibDem work and pensions spokesperson, has complained that “Under Labour, company pension rights have been slashed, with far fewer workers on middle incomes now building up decent pensions. Whilst the poorest will be entitled to means tested benefit, and the richest have continued to do well, Middle Britain has been abandoned” (quoted in the Financial Times of 13 October, 2004, ‘Downing Street rules out any solutions in the short term’).

Electoral considerations

Since it is obvious that any solution of the pensions crisis acceptable to the bourgeoisie is not going to be acceptable to the working class – at least not to the better-off sections of it who tend to participate in elections – the government has decided to postpone its decision as to what to do about the Turner Report until after the general election next year.

Instead of increases in the state pension that are urgently needed, as well as vastly improved social facilities and medical care for the elderly, there will instead be cuts and more cuts.

Within the context of capitalism, what the working class should be demanding is that the state pension should be increased to a level that will provide a decent standard of living for all pensioners. It would seem that this will require some 20% of GDP to be allocated for the purpose. People who have contributory pension schemes should be entitled to have their pensions made up to the state pension level if the contributory pension is less. If it is greater, then there should be no entitlement to state pension. In this way, contributory pension schemes should gradually wither away as there will be no need for them. The cost should be borne out of higher taxes on the bourgeoisie’s unearned income and the very high salaries of its closest flunkeys.

The bourgeoisie would certainly put up strenuous resistance to such a proposal, and only the most sustained struggle by the entire working class could force it to concede. As soon as the working class relaxed its guard, the bourgeoisie would once again push pensioners back into penury – or if not pensioners some other section of the working class least able to defend itself.

Very quickly the choice for the British working class is becoming clearer:

“Either place yourself at the mercy of capital, eke out a wretched existence and sink lower and lower, or adopt a new weapon – this is the alternative imperialism puts before the vast masses of the proletariat. Imperialism brings the working class to revolution” (Stalin, Collected Works Vol 6 p. 74-75).