Demographic Time Bomb ?

Some time ago the government here decided that the pension age for men and women would be equalised. Nothing wrong with that. But of course it is not to be equalised by lowering the age for men: nor by meeting in the middle. It is to be equalised by raising the age for women to the same as it is for men.

When this was announced it was said that there would be transitional arrangements so that those due to retire that year could: and those due to retire in the next few years would have that raised, but on a sliding scale, so there would be a period of adjustment. Thus a woman in her late 50's might retire at 62, and so on.

There followed a lot of hand wringing about the demographic time bomb, as outlined above. And so the age would have to be higher yet.

Last week without warning women in their late 50's got a letter saying that now they cannot get a state pension till they are 66: and next year it will be 67.

Today the guardian reports this:

www.guardian.co.uk/money/2012/mar/2...ates?CMP=twt_fd

It seems fairly evident that the aim is to reduce the costs of paying pensions to zero by the simple expedient of making us work until we drop dead.

Peole have paid contributions in tax and national insurance: and state pensions have been steadily eroded. During thatcher's time Michael Portillo was perfectly open about this when he said that it was his intention to make state pensions "nugatory" over time. So we cannot say we were not warned. People were encouraged to take private pensions which were said to be better. They weren't. They were very poor indeed and the misselling was a major scandal some time later. We cannot let the banks got to wall because they have those private pension funds: which I suspect will not pay out until you retire. If you have enough in a pension pot (which bankers and other very rich people like...say... David Cameron and the rest of the millionaire cabinet do), this is fine. But as I showed in another thread, people on median wages CANNOT provide an adequate income for themselves in the course of a working life. And now they will not get a state pension to keep them in old age. They will work instead

In another part of the forest there is enormous youth unemployment. In a third glade there is the reluctance of employers to employ older peope. Over in the grove beside the stream there is the attack on disability benefits so that if you happen not to be healthy in old age you cannot get support on those grounds either.

In the third world the young have to support their aged relatives: but they have no jobs here so that is not going to happen either. And it is obvious the government intends to ensure that if they do work they will not get decent pay, in any case, because the race to the bottom is evident in the decision to abolish standard wages in favour of "regional pay" based on what the private sector pays in areas where there are very few private sector jobs and those are mainly in asda and mcdonalds.

So what we see is poverty for the young, and poverty for the old, and povety for those in between,who are trying to support both. And all this in one of the richest countries in the world.

But we can afford the olympics: and we can afford to fight wars.

A 20% drop from the minimum wage is certainly too much. But it is true that if there is no inflation the savings model does not suffer as much: because, as we saw before, infaltion is a tax on wealth, and savings are wealth. My point in the earlier post is that there is inflation: and that is why 20% saved forty years ago is not much help today.

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.pdf

The 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


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:


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-12174193

The 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


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

I am coming back to this topic because something fairly obvious just occurred to me: I can be slow like that.

One of the features of this story of a demographic time bomb is the "divide and rule" strategy between the generations. We have discussed this to some extent on this board and it seems clear to me that it is a narrative which depends on a rewriting of history and a bestial view of economics and of society.

What I had not noticed is that the story is actually directly at odds with what is happening.

What we are told is that the older generations (sometimes called the baby boomers) have enjoyed a comfortable life with full employment and rising asset value and good pensions when they come to retire. All of those benefits have now disappeared for succeeding generations and so the story is that these selfish people have looked out for number one at the expense of those who come after and this is a bad thing.

As I have noted before, those people have not in fact lived that life - at least not the millions of them who have paid the price in unemployment etc. But let us imagine it is true, for the moment. What does it actually mean? I have spoken before about the dependency ratio, why it is important and also how it is calculated. It is not a very helpful measure unless your purpose is to promote this scare story. But such things are perhaps a little abstruse. What occurred to me today is to think about dependency within the individual life.

Youth unemployment is very high all over europe at present. What this actually means is that they depend on their parents to support them, and that is increasing as benefits in general are cut, on the basis of the neoliberal economic theory. Those parents are working for far longer as the age of eligibility for a state pension is raised and the final salary pension is abolished. They can't retire on less: they have grown up children to support

I realise it may make uncomfortable listening, but the fact is that it is this generation who are leeching off the ones they criticise. It is not their fault, obviously. But they might want to think about why they consider themselves to entitled to bed and board and income. They are the existing demographic crisis, arguably. It ill becomes them to whine about an anticipated need to support the old in later life, because they have enjoyed a decade more support from those same people than those people got from their own parents in their turn. Who, then, are the selfish free loaders we hear so much about?

In terms of years of dependency for the individual, the "baby boomers" typically started work at 15 and if they were fortunate enough to stay in employment they will now retire at about 68: so they work for 53 years. The official figure in this country was 40 years to earn a full state pension for much of that time: and is now 35. But in reality most folk worked from age 15 to age 65 (for women to age 60). So 50 years, and that is not fantasy, as the official figure is: it is what happened to most who could get secure work, and now there is no state pension for anyone under 66.

In contrast, those who are young now mostly go to college or university: so they do not start work until they are about 22, even if all goes well. For a great many you can add on at least a couple of years because of the desperate employment situation. They will also work past 65, certainly: but how much can you actually extend that realistically? Let us say that they work till they are 70, by the time they get there. If they get into work at 25 they will be productive for 45 years. It is presumably reasonable to assume that younger people might be more productive than older people, at least in some jobs (though that is not simple since there is a trade off between energy and experience, I think).

When we talk of a demographic crisis is this not what we should be thinking about? Why is the extended dependency of the young not the policy focus? I am not arguing against longer years in education, note. But I do not see the real world effects of the policy in terms of production in the real economy and I am not at all persuaded of the benefits of "social capital" as it is actually deployed.

That kind of narrative doesn't help anyone but the plutocrats.

Edited by FionaK - 7/9/2013, 14:10

The demographic time bomb is to the fore again in the context of the Scottish independence referendum. Doesn't seem to matter how often this narrative is challenged. It sails on as if it was real. So once again I did some digging about

The population of Scotland is about 5.2 million

In 2013, on the UK government’s own seriously flawed figures, there were 203,000 unemployed in Scotland: 7.4% of those of working age.

That takes no account of people who are ineligible to claim benefits: such as women of working age who cannot work because of child care responsibilities – 64,000 on the government’s estimate, or 104,000 according to the SNP. Add to that list those who are unable to claim because they have a working partner, and those who are not counted because they have part time work but would rather be in full time employment. Also add those who are unable to secure employment because they are disabled and suffer discrimination in a tight job market. Many of those people used to work: and could again. Most of them want to.

The total in employment (including part time and zero hours employment) was 2,536,000

So a better figure for unemployment is about 10%.

But let us stick with the official figure of 7% (rounded)

17% of the population is over 65, at present.

18% of the population is under 16 and those are also part of the dependency ratio.

So the way to look at this is to put all the dependents on one side of the equation; that is 40% of the population: and to put all those in work on the other side: ie: 60% are keeping all those dependents

The Scottish government, like the UK government uses a particular dependency ratio: it counts all those of working age as if they were in work: and so puts them on the wrong side of this equation. The effect is to change that ratio from what I give above to: 35% dependent: 65% working to keep them: quite a significant difference IMO

In 1971 the population of Scotland was also 5.2 million. Taken from the census data which is available for that year

In 1975 there were 100,000 unemployed people in Scotland (on a count which was more accurate than we have now). That was approximately 4.7% of the working age population and it was shocking: so much so that as it continued to rise the people rejected the labour government in 1979, an election memorable for the slogan “Labour isn’t working” with posters of long dole queues illustrating the unacceptablity of more than 1 million unemployed across the whole of the UK at that time. It is curious to realise it has never fallen much below 2 million since then: unless you realise that this is a reflection of the shift to neoclassical policy prescriptions which mandate high unemployment as a necessary aand desirable thing

http://hansard.millbanksystems.com/commons...nd-unemployment

One of the interesting things in this debate is this little-reported projection from the UK government’s social trends survey

The proportion of people aged 16 to 64 has increased from
61 per cent in 1971 to 65 per cent in mid-2008. This rise is not expected to continue, and the proportion of people in this age group is projected to fall to 60 per cent by 2031.

file:///C:/Users/user/Downloads/ST40_Ch01_tcm77-137121%20(1).pdf

So even if you accept these predictions we are not going to be much worse off by 2031 than we were in 1971, when we were not having a “demographic time bomb” at all.

In that period we see a ratio of 39% dependent to 61% working to keep them, on the conventional way of calculating it: or 42% (rounded) dependent to 58% working to keep them if you put the unemployed in the right place. Either way, we are better off in these terms than we were in 1971. Is that the impression you have gained?