The pensions crisis is one area of social policy that has been the focus of attention for some years. With an ageing population, more people entering higher education and a rather substantial deficit facing the government, pension reform has been high on the agenda and not just in the UK.
A number of factors have contributed towards the so-called pensions crisis: rising life expectancy; the ‘baby-boomers’ retiring; more people staying in education for longer; an ageing population. All of these have led to a dependency ratio that is becoming worse – fewer workers to support every pensioner. Over the past few years, strikes have taken place in protest to government pension plans, especially for public sector workers, who see the proposals as making them worse off once they retire. Doctors are the latest group to strike in protest over having to work longer before retiring and having to pay higher national insurance contributions.
So, are the doctors justified in their protests? They are currently on a final-salary pension scheme, which is a very generous scheme, although it is being phased out and replaced with a career average scheme, which will have big implications for doctors’ pensions. Furthermore, there was an overhaul of their pensions in 2008, thus the criticism that further changes are now being made to make them even worse off. Doctors do pay higher national insurance contributions than other occupations, such as teachers and they will naturally receive a higher pension than other NHS workers, such as nurses simply because they earn more. However, this does have big implications for their future.
Inequality is a big issue across the UK and this doesn’t only refer to income. Those earning higher salaries are more likely to live longer than the average worker. So, we see life expectancy inequality as well. The consequence of this is that once an individual retires at say 60, if your life expectancy is 85, then you have 25 years to live in retirement receiving whatever pension you have accumulated throughout your working life. If, however, your life expectancy is only 75, perhaps because of your background, your occupation, your health, then you will only spend 15 years in retirement. The person that lives longer therefore receives significantly more in pension payments and if this differing life expectancy is related to your occupation and thus your salary, then inequality of income clearly has some very wide implications for pension schemes and rates of contribution.
There are, of course, wider effects of any industrial action by doctors. Whilst some may agree with their view that this further pension reform is unfair, if any strike action does take place there will be wider economic effects. Those in need of treatment may have to delay it and if that means more people taking sick days, then the economic cost to the economy could be significant. The following articles consider the latest controversy in public-sector pensions.
Report
Independent Public Service Pensions Commission Final Report HM Treasury, Pensions Commission March 2011
Articles
Doctors’ strike: how the cost of NHS pensions soared Telegraph, Matthew Holehouset (21/6/12)
Are doctors’ pensions too generous Guardian, Hillary Osborne and Jill Insley (21/6/12)
Lansley: ‘Doctors’ pension scheme is generous’ BBC News (21/6/12)
Doctors get a nasty taste of Gordon Brown’s pension medicine Telegraph, Philip Johnston (18/6/12)
Doctors wrong on pensions, says Hutton Financial Times, Sarah Neville and Norma Cohen (19/6/12)
BMA ‘Inherent unfairness’ in doctor pensions BBC Radio 4 Today (21/6/12)
Reluctant move against intransigent government Scotsman, Dr Brian Keighley (21/6/12)
Will you be affected by the doctors’ strikes? BBC News (15/6/12)
Questions
- Explain the main factors that are contributing towards the so-called pensions crisis. In each case, is it a demand-side or supply-side issue?
- What are the main proposals to tackling the pensions crisis (not just for Doctors)?
- What is the difference between a career average and a final salary pension scheme? Which is better for (a) those on a higher salary at the end of their career and (b) those who are on a relatively lower salary at the end of their career? Make sure you explain your thinking!!
- What are the arguments both for and against this new round of pension reforms for doctors? Do you think the doctors are justified in taking strike action?
- What are the wider implications of industrial action? Think about the effect on individuals and on the economic performance of the wider economy.
- To what extent is it equitable that public sector workers should pay more in contributions and retire at the same age as the state pension age?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
Countries differ considerably in terms of the number of hours people work.
Despite the criticisms levelled at Greece, with some claiming that Greek workers are ‘lazy’, according to 2010 figures, the average worker in Greece worked 2109 hours per year – more than in any other European country. The average German worker worked 1419 hours and the average Dutch worker only 1377.
Internationally, amongst developed countries, Korea has the highest number of working hours per worker at 2193 per year. In the USA, the figure is 1778 hours and in the UK it’s 1647. (Click on chart below for a larger version.)
But working long hours does not mean working more productively. Generally the countries in which people work longer hours have lower output per hour.
The following podcast and articles look at the relationship between hours worked and productivity and consider which way the causality lies. They also look at related issues such as the proportion of part-time working and the length of annual paid holidays.
Podcast
Hardest Working Nations (also at) More or Less: BBC Radio 4, Tim Harford talks to Jon Messenger from the ILO (18/5/12)
Articles
Who works the longest hours? BBC News Magazine, Wesley Stephenson (23/5/12)
Are Greeks the hardest workers in Europe? BBC News Magazine, Charlotte McDonald (26/2/12)
Book
Working Time around the World ILO, Sangheon Lee, Deirdre McCann and Jon C. Messenger (Routledge, 2007)
Data
International Comparisons of Productivity – 2010 – Final Estimates: Statistical Bulletin ONS (6/3/12)
International Comparisons of Productivity – 2010 – Final Estimates: Data ONS (6/3/12)
Productivity Statistics OECD
Table 8: Average annual working time: Hours per worker Employment and Labour Markets, OECD
Questions
- Which countries tend to work the longest hours?
- Would cutting working hours, either through legislation or by agreement with companies, allow more people to be employed? Explain why it might be more complicated than this.
- What is the relationship between labour productivity per hour and the average number of hours worked per worker? Do people work longer hours because they are less productive or are they less productive because they work longer hours?
- Why factors determine labour productivity?
- Why may average hours worked be deceptive in terms of assessing how hard people are working?
- Why do US workers work more hours per year on average than UK workers?
Calls for a simplified tax and benefit system have been ongoing and many see the Coalition’s plans for a Universal Credit as a step in the right direction. However, a second suggestion set out in a report by lobbying groups is to introduce a single rate of income tax at 30%. The argument is that it will simplify the system, help lower income earners and boost growth.
As well as the introduction of a single rate of income tax, The 2020 Tax Commission’s Report also suggests an increase in the personal allowance to £10,000; scrapping National Insurance Contributions, stamp duty, inheritance tax and air passenger duty, as well as cutting fuel duty by 5p. For the typical tax payer, it may sound great – the difference between your gross and your net pay would narrow, but the wider consequences must be considered. Although a single rate of income tax would undoubtedly simplify the system, the impact on government finances must be considered. The commission predicts that overall borrowing would fall by £35bn after 15 years, but that the national deficit would increase by £49.1bn in the first year. Perhaps not an ideal solution given the current state of the national deficit!
The report does contain some radical change, but the idea of simplification is well-recognised as a necessary principle of any tax system. As the Chairman of the Commission, Allister Heath said:
It is time for Britain to make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system fit for the 21st century.
The 2020 Tax Commission has set out that plan and would ensure that income is taxed once at a single, much more reasonable rate. It could create the conditions to establish the UK as a global trading hub, generating renewed prosperity for all those who live and work here.
The current system is complex and many people end up paying an extremely high rate of tax, once everything has been paid. The Guardian article below gives a nice illustration. “If you earn income from shares, first corporation tax is taken out of the profits. Then you pay taxes on the dividends. Then because those profits drive up the share price you pay capital gains tax as well.” With a simpler and fairer tax system, the Commission argues that it will boost the competitiveness of the UK economy and help boost its struggling growth rate. How many, if any, of these proposals will be incorporated into the government’s plans is anybody’s guess, but it definitely presents an interesting solution and problem.
Report
The Single Income Tax The 2020 Tax Commission (May 2012)
Articles
Why it’s time for a single income tax Guardian, Matthew Elliott (21/5/12)
Business backs income tax rate of 30% Financial Times, Martin Sandbu (21/5/12)
Calls for single 30% income tax rate BBC News (21/5/12)
Single 30% tax rate ‘essential’ for growth Sky News (21/5/12)
Osborne urged to introduce 30pc income tax for all The Telegraph, Tim Ross (20/5/12)
Tax shake-up urged to empower consumers and kickstart growth Independent, Russell Lynch (21/5/12)
The Tax Reform Britain needs Wall Street Journal, Matthew Sinclair (20/5/12)
Questions
- What are the key principles of a tax system?
- Explain why simplicity is so important when reforming a tax system. How can it affect the incentive to work?
- Would a 30% single rate of income tax be equitable?
- If the reforms set out in the report were to go ahead, what do you think would be the impact on goods and services provided by the government, such as the NHS, education, roads?
- Using indifference analysis, illustrate the effect of a cut in the basic rate of income tax. How does it affect the decision to work more or less? You should consider the income and substitution effects in your answer.
- Why does the report argue that the reforms they suggest would help boost growth?
- How might the proposals affect government finances in both the short and long term?
Executive pay has been a contentious issue in recent years, with bankers’ bonuses stealing many headlines. Shareholders have been voicing their opinions on bonuses paid to top executives and the management teams at the banks in question are unlikely to be too pleased with the turn of events.
Nearly one third of shareholders from Credit Suisse opposed the bonuses that were set out to be paid to their executives; more than 50% of shareholders from Citigroup rejected the plan to pay their Chief Executive £9.2m for 2011 and, at the end of April, almost a third of shareholders at Barclays refused to support the bank’s pay awards. Barclay’s Chief Executive was to be paid £17.7m, but this revolt is just another indication of how the tide is turning against having to pay big bonuses to retain the best staff.
Bonuses are essentially there to reward good performance. For example, if a company or bank achieves higher than expected profits, you may support a bonus for the key individuals who achieved this. However, in the case of Barclays, the £17.7m package for the Chief Executive was to be paid, despite him saying that his bank’s performance in 2011 was ‘unacceptable’. I wonder what bonus might have been suggested had the performance been ‘acceptable’?
Revolts over big bonuses are not a new thing for 2012. Over the past few years, more and more resentment has been growing for the huge pay increases received by top managers. Many big companies around the world have seen shareholder revolts and this could mean the tide is beginning to turn on big bonuses. The following articles consider this contentious issue.
Credit Suisse and Barclays investors revolt over pay Reuters, Matt Scuffham and Katharina Bart (27/4/12)
Aviva rocked by shareholder rebellion over pay Guardian, Jill Treanor and Julia Kollewe (3/5/12)
Tide turns on bank bonuses as revolt hits UK Scotsman, Bill Jamieson and Tom Peterkin (28/4/12)
Barclays AGM: ‘We can’t pay zero bonuses, the consequences would be dire’ Telegraph, Harry Wilson (27/4/12)
Barclays shareholders have spoken. The overpaid must listen Guardian, Chuka Umunna (27/4/12)
Barclays suffers executive pay backlash Financial Times, Patrick Jenkins (27/4/12)
Aviva to review pay policy amid investor concerns Wall Street Journal, Jessica Hodgson and Vladimir Guevarra (30/4/12)
UBS faces shareholder opposition over executive pay New York Times, Julia Werdigier (3/5/12)
Low returns stir Europe-wide revolt on bankers’ pay Reuters, Steve Slater and Sinead Cruise (25/4/12)
Barclays targeted over bonuses Telegraph, Louise Peacock (9/4/12)
UBS gets stinging rebuke from shareholders on pay Reuters, Katharina Bart (3/5/12)
Vince Cable urges investors to keep up the pressure on executive pay Guardian, Jill Treanor (4/5/12)
Questions
- To what extent do you think high bonuses are the most important variable to a company in retaining the best staff?
- In The Telegraph article by Harry Wilson, Barclays’ Chairman is quoted as saying: ‘We can’t pay zero bonuses, the consequences would be dire’. What would be the consequences if Barclays did pay zero bonuses?
- What would be the consequence if all UK firms paid zero bonuses?
- How would smaller bonuses affect shareholder dividends?
- The Guardian article by Chuka Umunna says that ‘excessive pay and rewards for failure are bad for shareholders, the economy and society.’ Why is this?
- Should those receiving big bonuses be forced to give them up, if their company has under-performed?
- What are the main arguments for and against paying out big bonuses?
According to the Sunday Times Rich List, the combined wealth of Britain’s 1000 richest people grew by nearly 4.7% last year to £414 billion (after growing by 18% in 2010).
This is in stark contrast to average households, who saw their real incomes decline by 1.9% in 2011. As the Guardian article below says:
The Rich Listers are not merely the 1%, but the 0.01%, and this fanfared celebration of their assets feels like a celebration of things that nobody feels like celebrating: bankers’ bonuses, complex corporate tax-avoidance structures, the stifling grip of aristocratic family wealth.
So why are the rich getting richer and what are the implications for society and the economy? Watch and read the following webcasts and articles and then see if you can answer the questions below.
Webcasts
Rich List shows how super-wealthy have dodged recession (or) Channel 4 News (29/4/12)
Sunday Times Rich List: Wealthy getting richer BBC News, Ben Thompson (29/4/12)
Articles
Britain’s richest see fortunes rise to record high Reuters, Tim Castle (29/4/12)
Sunday Times Rich List shows rich recover wealth twice as fast Myfinances.co.uk, Ben Salisbury (29/4/12)
Sunday Times Rich List suggests UK’s wealthiest defy recession BBC News (28/4/12)
Sunday Times Rich List 2012: Wealth of richest grows to record levels The Telegraph, Patrick Sawer (28/4/12)
The Not-So-Rich-Any-More List Guardian, Oliver Burkeman and Patrick Kingsley (27/4/12)
Sunday Times Rich List ITV News (29/4/12)
Data
Distribution of Personal Wealth HMRC
The effects of taxes and benefits on household income ONS (19/5/11)
Household Quarterly Release 2011 Q4 – Real household actual income and expenditure per head ONS
Questions
- Distinguish between stocks and flows. Which of the following are stocks and which are flows: income, wealth, savings, saving, expenditure, possessions?
- If the combined wealth of the 1000 wealthiest people increased in 2011, does this imply that their incomes rose? Explain.
- Why have the super rich got richer, while average incomes in the country have fallen?
- What are the costs and benefits to society (other than the super rich) of the super rich becoming richer?
- Distinguish between the income and substitution effects of an increase in income of the wealthy. Which is likely to be larger and why?
