So it would be unfair to place the entire blame for the present unsustainable position on the Government, especially when one remembers the propensity of the pensions industry to remove in fees the money on which we were hoping to live.
But one cannot say the Government’s current policy is good for savers. “It kills them,” Michael Johnson says. “That’s what’s been going on.”
Johnson is a research fellow at the Centre for Policy Studies, for which he has written a number of sober and authoritative studies, including Put the saver first: catalysing a savings culture.
As a layman, I cannot pretend that I am fond of reading about pensions. It is not just that the subject reminds me of my own deficiencies as a saver. As Johnson himself remarks on page nine of his quietly devastating account of the shortcomings of Britain’s pensions industry: “The pensions and savings arena is a blizzard of complexity, jargon and meaningless terminology; perfect material for obfuscation and bamboozlement.”
So I was relieved to find that Johnson lives near to where I live. Yesterday morning I was able to go round for a briefing.
Johnson observed that the Treasury contributes about £54 billion to encourage people to invest in a pension. He reckons that about a third of that enormous sum – about £18 billion – ends up in the hands of the pensions industry, rather than of savers: a staggering waste of public money, and an appalling disincentive to save.
The top ten per cent of earners get 58 per cent of the subsidy that is going, while the poorest half of the population get eight per cent. This means, roughly speaking, that people who are earning over £45,000 a year get over half of the support that is supposed to encourage people to save. But since they already tend to be inclined to save, the subsidy becomes part of their tax planning.
The other 90 per cent of the population is poorly served by this subsidy. What it needs, in place of the present unfathomable complexity, are simple products where middlemen are unable to siphon off a large proportion of what savers and the Treasury put in. Johnson points out that adding the £54 billion to the £62 billion spent on the basic state pension would do much more to relieve pensioner poverty: “The merits of simplicity cannot be overstated. This would cut out all the middlemen.”
Johnson advises the Government on pensions, and worked with Oliver Letwin, Simon Wolfson, John Redwood and others to develop policies on economic competitiveness when the Conservatives were in Opposition. But Johnson himself is not a member of any political party, and sees opportunities for all of them in this field. For as he also said of the subsidy given to pensions: “It is the lowest hanging, juiciest piece of fruit in Whitehall if you want to make massive annual savings.”
I could not help observing that most newspaper columnists earn, even in these straitened times, over £45,000, so are liable to cut up rough about any attempt to remove the huge amounts of tax relief people in this bracket get. They also tend to live in valuable houses, which is why they turn pale at the thought of a mansion tax. In matters affecting their own pocket, leading commentators often turn out to be supporters of the status quo.
But the status quo is unsustainable. Interest rates are so low they have become (for the avoidance of doubt, these are my words rather than Johnson’s) a way of rescuing incontinent borrowers by robbing savers. The Treasury, the banks and people who have taken out mortgages they can now barely service are being bailed out at the expense of pensioners. Anyone who has to buy an annuity gets an appallingly bad return for decades of saving.
Perhaps this is inevitable. Perhaps it is the only way of averting a collapse that would hurt everyone, including pensioners. But as Sir John Major recently told South Norfolk Conservative Association:
“For the moment, low interest rates are unavoidable to preserve companies and create jobs but there is another face to low interest rates. We should remember they are cripplingly unfair to people who have saved money for their retirement. A lifetime of prudence and now the money they invest earns them almost nothing at all and their quality of life is diminishing as a result of that. No one wants sky high interest rates, but frankly the sooner they return to normal levels, say three to five per cent, the sooner we will move towards a fairer society that treats the saver as fairly as it treats the debtor.”
In political and economic terms, the decision about when to raise interest rates will be incredibly difficult. In the short term, the quiet gratitude of savers will most likely be drowned by the cries of pain from over-borrowed home owners who discover, too late, that the price of their only asset can go down as well as up.
For George Osborne, one could say that the economy is recovering too quickly, bringing with it the danger of a rate rise before May 2015. For the Bank of England under Osborne’s appointee, Mark Carney, a test of independence is approaching.
In the long run, it has been said, we are all dead. But before we die, most of us will need to support ourselves from our savings, or else, as James Barty observed on this site yesterday, throw ourselves on the mercy of the state. This is one reason why the present discouragement of saving is such a bad thing, and will in future have bad consequences for the Treasury as well as for individuals.
Johnson observes that our savings ratio since 1948 has averaged six per cent, about the level it is at now. He reckons it needs to be about 12 to 15 per cent in order to give us enough to live on in our old age without bankrupting the public purse.
There is no sign of that happening. If anything, the move is in the other direction. The average household has £6,000 of consumer debt and £55,000 of mortgage debt. On consumer debt, one is already likely to be paying about 18 per cent a year in interest. Johnson argues that rather than auto-enroll such people in pension schemes with a return of three per cent a year, it would make more sense to get them to pay down their debt.
The Government is two-faced about saving: it wants us to go out and spend, which brings VAT receipts to the Treasury, but it also wants us to be able to support ourselves, so we draw as lightly as possible on the welfare budget. Johnson finds himself reminded of the pushmi-pullyu, the animal with two heads in the Dr Doolittle stories.
I asked a woman in her eighties if she thought attitudes to saving had changed. She said:
“What’s changed is that people now expect everything at once. In the old days, if you were really poor you had different jam jars for things like rent and electricity, and you tried to put a bit of money by for your funeral. There was a completely different attitude: much more make do and mend. This was accentuated by the Second World War, but not caused by it. In the 1930s a lot of people had to make do and mend because they hadn’t got anything. I think we’ve got far too dependent on credit. They do sort of trap you, I think. Once you’re in their grip you can’t get out. There’ve always been some people who take no thought for the morrow. But the great mass were more prudent. There was an absolute horror of debt because you felt you’d never get rid of it. You were so frightened of debt you’d do almost anything to avoid it.”
The paradox of thrift suggests that if we are all thrifty, we shall all get poorer. And being in debt is for some people more stimulating than having money in the bank. Disraeli has a character in one of his novels – Fakredeen in Tancred – who is “fond of his debts”, and exclaims: “The two greatest stimulants in the world. Youth and Debt! Where should I be without my debts, dear companions of my life that never desert me…”
Some years ago, when I interviewed some workers at the Nissan factory outside Sunderland, I found they were so heavily borrowed that they had no choice but to accept the management’s demand for new working practices as the price of getting a new model.
Here is the greatest objection to debt: that it destroys freedom. The man or woman of independent means can exercise a judgment that is not at the mercy of a government or a corporation.