Cutting wages is no solution

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As a simple fact of mathematics, any organisation which can cut the salaries it pays to its employees will ‘save’ money. Whether it’s a sensible thing to do, whether it’s the right thing to do, whether the employees will calmly accept the reduction without resorting to industrial action – none of those things affect the simple mathematical truth that reducing salaries means the employer spends less to achieve the same result. For those of us lucky enough to be part of an occupational pension scheme (which is most people by now, even if some of the schemes aren’t particularly good), the employers’ contribution to those schemes is part of the overall remuneration package: it’s a form of deferred salary. Cutting the amount employers pay for pensions is, therefore, a wage cut by another name – it’s just that the impact won’t be felt immediately.

One of Reform Ltd’s latest wheezes to ‘save’ money involves doing just that – cutting back on the benefits paid out in pension schemes, and thus reducing the amount of the deferred salary due to employees. It’s a not very well disguised salary cut. Whether it’s quite the pain-free saving as which it appears in the short term is another question, however. Reducing the incomes of future pensioners will reduce their retirement standard of living. By how much depends on the circumstances of the individuals, but we can be certain that at least some will end up applying for extra benefits as a result, and it will also reduce the amount of income tax collected from pensioners – it’s not a ‘no-cost’ proposal. Looking at the wider economic impact, people with less money spend less as a result, and that in turn reduces demand in the economy.

The fact that none of this is immediately obvious to many is down to the fact that the real impact won’t happen for years – or even decades – when those with a reduced pension reach retirement age. Maybe those proposing it believe that it will be so effective in deterring people from retiring at all that the impact will be insignificant. In a world which increasingly treats only ‘working people’ as having any validity whilst all others are to be regarded as a ‘burden’, that’s a perfectly possible interpretation. It’s a view of the world which isn’t restricted to Reform Ltd – it will probably be mainstream Labour-Tory policy in a year or two. It highlights a feature of politics – and indeed, the capitalist economic system – which is the increasingly short term views which prevail. A society which works for all people throughout their lives has to take a long term view, considering the first 18 years of life, as well as the last 20-30, when people are likely to be ‘unproductive’ in economic terms, but are still part of the society in which they live. Squeezing out costs in the short term might be good micro-economics, but it’s lousy macro-economics, quite apart from being a lousy way of treating individual members of society. It’s a distinction which those who benefit directly from the short term gains are unable – or, more likely, unwilling – to understand.