I have been having a look at the National Insurance Fund, ( I know, I am sad like that), and I have learned some interesting things.
In the first place, I had believed that there was no such thing. This is the conventional tale in the UK: we run a "pay as you go" system so there is no actual fund to draw on for benefits. That is important, because we are told that the demographic time bomb renders the system unsustainable, and this is the reason for raising the retirement age and cutting benefits. I had not thought to look into that because I "knew" that this was the case.
Well so it is: sort of. But that is not the whole story.
I looked at the accounts for 2010/11 and they are easily available here
www.hmrc.gov.uk/about/ni-fundaccount10-11.pdfThe paper provides quite a useful summary of the NIF, and it outlines the financial position quite clearly. The NIF pays out contributory benefits only: it is not the mechanism for non-contributory benefits so that is a separate issue. But contributory benefits includes the state retirement pension, and that is by far the biggest item of expenditure for this fund.
The first thing to note is that there is an expectation that the fund will have a minimum surplus of 16.7% (two months worth of total expenditure): this is called a "working balance" and is a perfectly sensible provison because there is a lag between changes to the levels of contributions etc and actual receipt of the money, for example.
In fact, in the year 2010/11, that working balance fell from the level in the previous year, to 55% of the annual benefit expenditure. In short, the contributions have been set at a level far higher than pay as you go would imply, and obviously this has been true for some time. I have not tried to find accounts for earlier years, to see when that started: but the surplus is far higher than what is advised on the basis of prudence.
I have no quarrel with that at all. The money could be used to pay out higher benefits, certainly, and given the avowed purpose of the scheme so it should be. The fund is not allowed to borrow any money at all, however, so a cushion is sensible. At present the fund is paying out more than it is taking in, and so if we project into the future that cushion will be eroded. I do not think it unreasonable to have a capital reserve in those circumstances, despite the uncomfortable way that sits with pay as you go.
But what I do have a problem with is this: The surplus in the previous year was £48,456,638,000. That is a capital balance held by a department with a specific remit to pay out contributory benefits and with no power to borrow if there is a shortfall in receipts required to pay those benefits. The accounts should show the return on that capital because it must be held somewhere. And they do show "Income from Investment Account" in the sum of £204,124,000. I may be wrong, but that looks like interest of 0.4% to me.
In the accounts this is glossed over by the statment
QUOTE
Interest earned on the NIF balance remains low due to the historically low interest rates.
Neatly done: interest rates are historically low: but they are not that low. A quick search around shows that you can easily get 3% in an ordinary account with a bank: and that is on a balance far less than we are talking about. Nothing fancy or risky: just an ordinary bank account (well you may think that is risky now, but the point stands)
If they were getting ordinary interest on a balance of £48,456,638,000, the income should be £1,453,699,140. The difference is £1,249,575,140.
The excess of payments over receipts in the accounts is £5,622,646,000. So the interest foregone would not cover it all: but it would make a hell of a dent in it. Especially since the figures for the preceding year are comparable: and so there should be an extra billion or so in the opening balance if proper interest was received. I do not know about earlier years, so I cannot say for certain there is any more of this: but I see no reason to suppose it was any different.
What is going on? Well the accounts tell me that the surplus does not go into a bank: it goes in to an account held by something called CRND (Commission for the Reduction of the National Debt). A letter dated 9/9/10 from one Steve Webb, a pensions minister, addressed this question. He said:
QUOTE
Under long-standing legislation, contributions paid in can only be used for contributory benefits and where any ‘surplus’ exists – it is held in a short-term investment account run by the Commissioners for the Reduction of the National Debt. This means the government will borrow less from elsewhere
So the NIF cannot borrow: but it can gift to the government for expenditure elsewhere. Well that sounds reasonable: not.
It would not matter if this shortfall was not being used to hype up panic about the demographic time bomb, and how pensions are not affordable. But it is. It is always worthwhile to investigate these certainties: but it is wearisome as there are so many intertwined issues, and so little time. I think this kind of thing should be picked up in the press. But s it is not readily found in the front page splashes about unaffordable welfare: and it is not even spelled out on the business or social pages, when the pensions problem is discussed: not that I have seen. As an example this is the report in the Guardian on publication of these accounts
www.bbc.co.uk/news/uk-politics-12174193The report just states what the accounts say wrt the interest: no exploration of that at all. It does tell us that the NIF accounts for 64% of all welfare spending in the uk: which is no surprise since pensions are the biggest chunk of public spending in that field.
The accounts state some other interesting things which are more obvious. The shortfall is due to increased benefits payments and reduced receipts. In a time of high unemployment that is inevitable: the receipts are directly tied to wages; and the payments include payments of unemployment benefit. It is unfortunate that the two years' accounts reported are for years when we have had very poor growth and rising unemployment: but it is obvious that in previous years there must have been surplus in order to build up this capital. Indeed the guardian report linked above says that the 2009/10 accounts were the first to show a shortfall since 1993. I suggest that this is nothing to do with any problem in the demographic and everything to do with the recession and crash in 2008.
The accounts also note that £927 million pounds is owed to the fund in unpaid conributions from the self employed, an increase of £200 million ove the previous year. Oddly, in discussing this particular problem, the accounts say this
QUOTE
The debt balance continues to increase as there is no functionality within NPS to pursue and recover outstanding debts or IT capabilities to transfer debts to systems within Debt Management & Banking (DMB).
But they are working on it: if they are successful that will make another dent in the shortfall
For me this is yet more evidence that the government is using these cherry picked figures to support an opportunistic move to impoverish us all. I note that the accounts make other assertions which would bear further scrutiny: for example it says that it is anticipated that contributory benefits will account for 8% of GDP in 2075, up from 5% now. Those figures may not be reliable, because they include the same kind of assumptions outlined when I talked about the american figures for medicaid etc. But even if they are accurate is 8% unreasonable for the support of elderly and the unemployed and the bereaved and new parents? I dont think so.
They do not take account of the changes to entitlements which have been made recently, either: for example in the account narrative it says that women's pension age will be equal with that of men in 2018: and that both will rise from 65 to 66 starting in December 2018. As I noted above, that has been brought forward significantly. The pensions "crisis" was the justification for those changes: I think that is deeply suspect on the basis of these accounts
Edited by FionaK - 1/7/2012, 14:57