When is a tax not a tax?

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The government which decided to reduce pensioner income by scrapping the Winter Fuel Allowance, and which continually hints at the ‘unaffordability’ of the pensions triple lock is, apparently, the same government which is now forecasting a ‘tsunami’ of pensioner poverty. It’s almost as though cause and effect is some sort of alien concept. They’re not alone, of course – the Tories and the Farageists are making similar noises about affordability. The alternative to funding an adequate level of pension through taxation is, it seems, for employees to save more.

Superficially, it sounds rational and logical; those of us benefitting from occupational pensions certainly understand the benefits of saving into a work-based pension plan. The difference, though, is not all it is painted as being. The state pension is nominally funded by tax deductions from employees and employers, and it’s true that those taxes might well need to increase if there are more pensioners and if the level of pensions continues to rise. Mandatory occupational pensions (the government’s preferred alternative), on the other hand, are funded by compulsory payments by employers and compulsory deductions from salary. The payments might not be defined as ‘taxes’ because the money never goes through any government accounts, but their effects on business operating costs and net disposable income are remarkably similar. It turns out that we can indeed afford to pay better pensions if the same people pay the same money to a private company and pretend that it’s nothing at all like a tax.

Whilst the difference might not be immediately obvious to those paying the contributions, there are, of course, some other differences. The first is that private pensions money is invested to pay for future benefits rather than used to pay current benefits. But the difference between an investment-based approach and the current Ponzi-scheme approach for state pensions is a matter of political choice, not an inevitable consequence of a state-run scheme. The second difference is, purely coincidentally I’m sure, that the private pensions company take a slice off the top as payment for administration and profit for their shareholders.

The biggest and most important difference is in terms of who benefits and by how much. The state pension is based on paying a single basic amount to all, even if the contribution rate is based, albeit loosely, on the income of the individual employee. There is, in that sense, an element of redistribution involved. Workplace pensions, however (and this is true, although in slightly different ways, of both defined benefit and defined contribution schemes), pay out a pension amount which is related to the payments made – and thus, in turn, to the salary of the individual. Labour’s preference for a savings-based approach to increasing pensions thus has two main financial effects – increasing profit for finance companies in the City of London, and ensuring that benefits flow to the richest rather than the poorest. All in the interests of pretending to reduce the demands on what they insist on calling ‘taxpayers’ money’ by replacing a potential tax increase with an alternative compulsory levy. It’s hard to find a clearer statement of modern-day Labour Party values.