Tag: pensions

The linked article below from The Guardian paints a disturbing picture of the long-term problem of servicing both private-sector and public-sector debts.

With interest rates at historical lows, the problem has been masked for the time being. But with interest rates set to rise within a few months, and significantly over the coming years, the burden of debt servicing is likely to become severe. This could have profound effects both on long-term economic growth and on the distribution of income.

As the author, Phillip Inman states:

The funding gap is growing and with deficits on so many fronts, it is hard to see how promises to pensioners and health service users can be met without a dash for growth that is unsustainable, a switch to dramatic cost-cutting in other areas or higher taxes on those who came through the recession relatively unscathed.

You are probably facing the problem of growing debt yourself. How long, if ever, will it take you to repay your student loans? What impact will this have on your ability to spend and to have a ‘decent’ standard of living? Will you be able to afford a mortgage large enough to buy a reasonable house or flat? Will you be able to afford to do a masters degree or PhD without support from your parents or relatives or without a scholarship? And even if you manage to secure a well-paid job, will you be able to afford a reasonable pension for when you eventually retire?

The article looks at the nature of the problem and its causes. It concludes by saying:

Britain has become expert at putting off decisions and hoping for something to turn up. Without a return to ultra-cheap commodities, another technological/productivity revolution, or a return to more modest living and delayed gratification, it’s a plan that is running out of time.

Article

Trouble in store: the grave future of British public and private debt The Guardian, Phillip Inman (20/7/14)

Report

Fiscal sustainability report Office for Budget Responsibility (10/7/14)
Fiscal sustainability report – Executive summary Office for Budget Responsibility (10/7/14)
Fiscal sustainability report – Supplementary data series Office for Budget Responsibility (10/7/14)

Questions

  1. Why is public-sector debt likely to continue rising significantly over the coming years unless there is a concerted policy to make cuts in public expenditure?
  2. What factors are likely to lead to a rise in private-sector debt over the coming years?
  3. What factors have caused a redistribution from the younger to the older generation?
  4. How have ultra low interest rates affected the distribution of income?
  5. What is likely to happen to the gap in wages between ‘graduate’ jobs and ‘non-graduate’ jobs? Identify the factors likely to influence this gap?
  6. What is meant by ‘hire purchase’? Are leasing schemes for car purchase a form of ‘hire purchase? Are there similar schemes in the housing market?
  7. Does it matter if a country’s debts rise (either public or private) if the creditors are in the same country? Explain.

In his Budget on March 19, the Chancellor of the Exchequer, George Osborne, announced fundamental changes to the way people access their pensions. Previously, many people with pension savings were forced to buy an annuity. These pay a set amount of income per month from retirement for the remainder of a person’s life.

But, with annuity rates (along with other interest rates) being at historically low levels, many pensioners have struggled to make ends meet. Even those whose pension pots did not require them to buy an annuity were limited in the amount they could withdraw each year unless they had other guaranteed income of over £20,000.

Now pensioners will no longer be required to buy an annuity and they will have much greater flexibility in accessing their pensions. As the Treasury website states:

This means that people can choose how they access their defined contribution pension savings; for example they could take all their pension savings as a lump sum, draw them down over time, or buy an annuity.

While many have greeted the news as a liberation of the pensions market, there is also the worry that this has created a moral hazard. When people retire, will they be tempted to blow their savings on foreign travel, a new car or other luxuries? And then, when their pension pot has dwindled and their health is failing, will they then be forced to rely on the state to fund their care?

But even if pensioners resist the urge to go on an immediate spending spree, there are still large risks in giving people the freedom to spend their pension savings as they choose. As the Scotsman article below states:

The risks are all too obvious. Behaviour will change. People who no longer have to buy an annuity will not do so but will then be left with a pile of cash. What to do with it? Spend it? Invest it? There are many new risky choices. But the biggest of all can be summed up in one fact: when we retire our life expectancy continues to grow. For every day we live after 65 it increases by six and a half hours. That’s right – an extra two-and-a-half years every decade.

The glory of an annuity is it pays you an income for every year you live – no matter how long. The problem with cash is that it runs out. Already the respected Institute for Fiscal Studies (IFS) has said that the reform ‘depends on highly uncertain behavioural assumptions about when people take the money’. And that ‘there is a market failure here. There will be losers from this policy’.

We do not have perfect knowledge about how long we will live or even how long we can be expected to live given our circumstances. Many people are likely to suffer from a form of myopia that makes them blind to the future: “We’re likely to be dead before the money has run out”; or “Let’s enjoy ourselves now while we still can”; or “We’ll worry about the future when it comes”.

The point is that there are various market failings in the market for pensions and savings. Will the decisions of the Chancellor have made them better or worse?

Articles

Pension shakeup in budget leaves £14bn annuities industry reeling The Guardian, Patrick Collinson (20/3/14)
Chancellor vows to scrap compulsory annuities in pensions overhaul The Guardian, Patrick Collinson and Harriet Meyer (19/3/14)
Labour backs principle of George Osborne’s pension shakeup The Guardian, Rowena Mason (23/3/14)
Osborne’s pensions overhaul may mean there is little left for future rainy days The Guardian, Phillip Inman (24/3/14)
Let’s celebrate the Chancellor’s bravery on pensions – now perhaps the Government can tackle other mighty vested interests Independent on Sunday, Mary Dejevsky (23/3/14)
A vote-buying Budget The Scotsman, John McTernan (21/3/14)
L&G warns on mis-selling risks of pension changes The Telegraph, Alistair Osborne (26/3/14)
Budget 2014: Pension firms stabilise after £5 billion sell off Interactive Investor, Ceri Jones (20/3/14)

Budget publications

Budget 2014: pensions and saving policies Institute for Fiscal Studies, Carl Emmerson (20/3/14)
Budget 2014: documents HM Treasury (March 2014)
Freedom and choice in pensions HM Treasury (March 2014)

Questions

  1. What market failures are there in the market for pensions?
  2. To what extent will the new measures help to tackle the existing market failures in the pension industry?
  3. Explain the concept of moral hazard. To what extent will the new pension arrangements create a moral hazard?
  4. Who will be the losers from the new arrangements?
  5. Assume that you have a choice of how much to pay into a pension scheme. What is likely to determine how much you will choose to pay?

The most common demands for trade unions are for higher wages and better working conditions. However, pensions have become an increasingly important issue that many public-sector workers in particular have raised concerns over. While actions by trade unions have been less frequent and public in recent months, the Public and Commercial Services Union (PCS) has voted to strike.

The labour market works like any other market – there is a demand for and supply of labour. The intersection of the demand and supply of labour give the equilibrium wage rate and equilibrium number of workers. Trade unions may aim to push up the wage rate above this equilibrium and the impact on the number of workers employed will depend on the type of labour market. If we have a competitive labour market, then the increase in wage will create an excess supply of labour: that is, unemployment. This is often a choice a trade union has to make. However, if the market is a monopsony, then it is possible for a trade union to force up wages and yet there may not be any fall in the number of workers employed.

Pay is just one of the issues being raised by the PCS. Public-sector pay was frozen for two years for those earning above £21,000. According to the Cabinet Office, this was necessary to ‘protect jobs in the public sector and support high quality public services.’ A 5% pay rise has been requested to counter an alleged 7% fall in earnings since 2008. 61% of those who voted in the ballot were in favour of strike action. Other concerns include job losses and pensions.

One concern of the PCS will be the low turn-out. Only 28% of the union’s members voted in this ballot and this is likely to weaken the union’s bargaining position. The government has monopsony power in employing civil servants and this is one of the reasons why a powerful trade union is likely to emerge: it acts to reduce the power of the monopsonist employer. Negotiations will typically take place between the employer and the trade union and with such a low turn-out, the power is certainly with the government. However, with the threat of strike action to occur around the time of the Budget, this does present something of a concern for the government, especially with growth remaining weak and the loss of the AAA rating.

Two separate pay offers have been made to 1.6 million public-sector workers, but Unison has suggested that members of PCS should reject them. If headway is not made in negotiations between PCS and the government, then strike action could be just around the corner. The following articles consider this looming industrial action.

Articles

Questions

  1. Use a diagram to illustrate a competitive market for labour and show how a trade union will aim to push up the wage rate. Show why a trade-off exists between the higher wage and the number of workers employed.
  2. Illustrate a diagram showing a monopsony and explain why the MC curve exceeds the AC curve. Why is it possible for a trade union to force up wages without creating a decline in the equilibrium number of workers employed?
  3. What other actions, besides striking, are available for trade union members? What are the costs and benefits of each relative to striking?
  4. Which factors, besides a low turn-out in the ballot, will reduce the trade union’s negotiating power?
  5. Public-sector pay was frozen for two years. If the government accepted the trade union’s pay demands, what would be the impact on the budget deficit? Could the higher pay help boost economic growth by creating a multiplier effect?

Trade union action has been a feature of the British labour market over the past few years, as discussed in this first and second blog. With the government’s austerity measures still in place and ongoing issues over pension provision, there are many explosive issues that will undoubtedly be discussed at this year’s TUC Conference in Brighton.

We have already heard from numerous unions that strike action over the coming year is ‘inevitable’. With rising prices, static or even falling wages, reduced pension provision and increased contributions, the cost of living has become increasingly unaffordable for many members of the trade unions. Dave Prentis, the General Secretary of Unison said:

‘I think people have been pushed into a corner. They are moving into poverty … The threat is that if we can’t move forward in negotiations to find a way through it then we will move to industrial action. There is no doubt whatsoever that we can create disputes throughout next year.’

Although few would argue against the notion that the government’s finances are in a dire state and spending cuts together with tax rises are needed, the controversy seems to lie in exactly when these cuts should take place and how severe they should be. For many, cutting government spending and raising taxes whilst the economy is still in recession is asking for trouble. For others, it’s the right thing to do and everyone should play a part in helping to return government finances to a semblance of balance. The Labour government has traditionally supported trade unions, but even their leadership backed the government’s plan for pay restraint for public sector workers. This, together with the continuing debates over public sector pensions has clearly angered many public sector workers, thus creating this ‘inevitable’ industrial action over the coming year.

Unison and GMB have said that they will be working together in order to try to better pay and conditions for its members, by co-ordinating public-sector strikes around Spring next year. Co-ordinated strikes across a variety of sectors could create havoc for the economy. Not just disruption for the everyday person, but losses for businesses and the economy. A general strike has not taken place since 1926, but it is thought that TUC delegates will be voting on whether or not one should be planned. So, when faced with these inevitable strikes, should the government back down and cut back on austerity or stand up to them and suffer the disruption of a strike, whilst continuing on with bringing its budget back on track? The following articles look at the TUC Congress and the proposed strike action.

Public sector unions plan Spring strikes Guardian, Dan Milmo (9/9/12)
Trade union warns of further strikes Financial Times, Brian Groom (7/9/12)
Trade union officials gather for TUC Congress in Brighton BBC News, John Moylan (9/9/12)
Unite union leader warns of wave of public sector strikes Guardian, Dan Milmo (7/9/12)
Unison and GMB unions planning co-ordinated strikes over pay BBC News, Justin Parkinson (9/9/12)
TUC Conference 2012: a mixture of new and old Channel 4 News (9/9/12)
Government must stand up to these TUC bully tactics Express, Leo McKinstry (9/9/12)

Questions

  1. What is the purpose of a trade union?
  2. What is the difference between individual and collective bargaining? Why is collective bargaining likely to be more successful in achieving certain aims?
  3. If there is co-ordinated strike action, what are the likely costs for (a) the workers on strike (b) the non-striking workers (c) businesses and (d) the economy?
  4. What are the main issues being debated between unions and the government?
  5. Explain the economic reasoning behind Dave Prentis’ statement that people are being moved into poverty.
  6. Do you agree with strike action? Do you think it has any effect?
  7. When do you think is the right time to implement austerity measures? Has the government got it right? As always, make sure you explain your answer!!

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

  1. 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?
  2. What are the main proposals to tackling the pensions crisis (not just for Doctors)?
  3. 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!!
  4. 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?
  5. What are the wider implications of industrial action? Think about the effect on individuals and on the economic performance of the wider economy.
  6. 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?
  7. How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.