Tuesday, 29 January 2013

What to do about pensions?

As the public debate is gathering pace about who may win the election in 2015, academics are starting to look back to the events leading up to the last election in 2010. The distance to events may afford them some objectivity and a collection of papers in the British Journal of Politics and International Relations gives a good snapshot of several takes on the matter.

One of the most interesting contributions is by Matthew Watson. Essentially, he argues that New Labour instituted a welfare to work policy that was informed by the principle of individual responsibility. Whilst the electorate was largely supportive of this, Blair and Brown then transplanted this approach to other parts of the welfare state, in particular to pensions. Individual responsibility in the field of pension provision however did not quite match the largely simple equation that could be applied to work readiness schemes for two reasons.

First, saving for pensions is a more complex behaviour with multiple incentives. Second, the shift to individual pension investments meant that pension provision moved from state funded welfare to the financial markets. Critically, those were outside of governmental control, so that when the financial markets collapsed, Brown's government had to underwrite private market institutions with massive state funding (supplying the banks with cheap credit) which ultimately increased state expenditure more than any pension increase would have done. In essence, by favouring individual pension schemes, the government gave up control over an instrument of welfare policy, and gained a disaster in return.

Watson calls this the 'paradox of responsibility', indicating the conflict between the original motive of New Labour to introduce individual responsibility into welfare provision, and ending up (irresponsibly) propping up unpredictable financial markets.

There is much to be said for this argument it seems to me. However, the main question remains largely unanswered. Could New Labour have plausibly resisted the shift from universal state funded benefit provision to more individual responsibility in welfare? This has been a global rather than an isolated national change. The German government under Gerhard Schroeder introduced the 'Riester' pension scheme, essentially a state backed pension fund that invested the payments in the stock market. So, New Labour's reform of the pension system was by no means unique.

The loss of governmental control over welfare policies is also one that is mirrored in other areas. National governments' ability to 'steer' behaviour is not just squeezed by ill-fated attempts to outsource pensions to financial market investment products. Welfare provision as a simple re-distributive exercise had long become unsustainable due to the demographic changes in all Western countries.

So the search for a better solution continues. At the moment, neither the current government nor the opposition has developed viable proposals to deal with welfare expenditure (especially pension and social care costs) in the long term.

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