18 September 2020

Let’s be honest, Britain’s state pensions are little more than a Ponzi scheme


Have successive governments ‘stolen’ tens of thousands of pounds from women affected by change to the state pension age?

If you’re at all familiar with the law and how the state pension works, the answer is ‘obviously no’. But that raises another question: how familiar are ordinary people with those nuances? And how detailed is it reasonable to expect their knowledge to be?

The question arises from a recent defeat in the courts by the Back to 60 campaign – specifically, an attempt by two women to have the legislation equalising the pension age between men and women declared illegal.

It’s a good news story, not just for people like me who are wary of the courts getting dragged into political campaigns, but also because pension reform is a worthwhile cause in itself.

But the case also puts a spotlight on two other issues, both rooted in the limits of public understanding of the law.

The first, which Barbara Rich explores in her very handy summary of the case, is the question of campaigners misleading their audience when crowd-funding legal challenges. In this case, the women bringing the case insisted on talking up the prospect of ‘full restitution’ – i.e. the payment to each woman of all the money they notionally lost out on – even though this was not only extraordinarily unlikely, but not what their case was actually trying to achieve.

But the second is arguably much more serious: that successive British governments have, for decades, essentially deceived the public about the true nature of the state pension system by pretending that individuals paying National Insurance are somehow making concrete contributions towards their own retirement.

This isn’t an accident: the misdirection was baked in from the start. It was Nye Bevan, one of the principal architects of the Attlee state, who first said that “The great secret about the National Insurance fund is that there ain’t no fund.”

Instead of being ring-fenced, National Insurance contributions are simply put into the general pot, and pension obligations are paid out the same way. Here’s how Rich puts it: 

“Entitlement to a state pension is very different from entitlement to benefit under an employer’s or self-employed pension scheme. The state pension is part of the social security system. Individuals make National Insurance contributions in each tax year, but these do not go towards an individual fund for the future.”

She then goes on to attack Labour MPs Claudia Webbe and Zarah Sultana for indulging the rhetoric of groups such as the WASPI women by claiming the Government has ‘stolen’ their pensions. Quite right too: as legislators, they are in a position to know better and have a duty not to mislead the public in this way.

But the same is most likely not true for millions of ordinary people affected by the changes. As far as they were concerned, they were saving for their own retirement in the manner the Government expected. To use the ubiquitous phrase, they have “paid in”. 

If a private sector organisation pretends to be a discrete fund whilst paying out ‘dividends’ from the money paid in by new investors, we call it a Ponzi scheme and we recognise that those who get caught out by it are victims, no matter if some of them were imprudent or greedy. Likewise, support for the overall objectives of pension reform should not prevent us from acknowledging that successive governments have been tacitly misleading the public about the true nature of the pension system and their position in it. 

Scrapping National Insurance has been intermittently on the Conservatives’ radar for a long time. Even if Rishi Sunak isn’t inclined to go that far, the WASPI and Back to 60 cases show that there is at least a clear case for abandoning the pretence of an insurance system and rebranding it as what it is: a jobs tax.

Ministers have not seen the last of pension reform. As part of the broader challenge of Britain’s ageing population it isn’t going away, and without doubt deeper structural changes are going to be needed sooner or later. Shifting public perceptions of the state pension from a concrete investment to a welfare entitlement will be vital to winning public support for further change. Scrapping the current, deceitful arrangement is a good place to start.

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Henry Hill is assistant editor of ConservativeHome.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.