Sweden's social welfare popularity

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Among the intellectual feast that was this summer's Stockholm meeting of the Mont Pelerin Society was a challenging and controversial paper on the popularity of Sweden's social welfare system [pdf here]. As Sweden has progressed from its outrider position on social democracy into a fairly mainstream OECD economy, the popularity of their generous and far-reaching welfare system has not diminished. Indeed, opinion poll evidence suggests it has increased.

The explanation was provocative. It is that Sweden is not a community paradise in which everyone accepts the state provision as fair and equal. Rather it is that changes to Swedish welfare have allowed people to tailor it to suit their own individual circumstances. The school reforms allow them to choose with state money the schools they would have chosen if they had had to pay fees direct to the school instead of via taxation. Similarly in areas like sickness and unemployment cover, people now routinely use private cover to top up the level of state provision to the degree of cover they prefer.

The rule is that it is easier for people to top up a modest state coverage than it is for them to sell off any surplus if the state coverage is more than they need. So topping up is now normal, allowing people to augment state cover to the level of welfare coverage they feel they need. The popularity of Sweden's system rests, it is suggested, on the fact that it provides through taxation something fairly close to what people would have chosen had they been spending their money directly.

The key to that is the scope for individual variation. In place of a one-size-fits-all blanket state coverage, there is opportunity throughout for it to be tailored to individual circumstances. It is a remarkable thesis, with lessons for the UK if it is borne out. Maybe we should be looking at ways that allow UK citizens to tweak and tailor our state services and welfare to suit their own individual needs?

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

The future of pensions

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The Royal Society of Arts, run by Tony Blair's old adviser Matthew Taylor, has come out with a plan to rejuvenate the UK pension system. It builds on the government's new pension initiative, whereby employees will be automatically signed up for a no-frills workplace pension in an individual account, which they can take with them as they move between jobs. But the RSA report's author, David Pitt-Watson of Hermes Equity, says that people should be able to put in as much money as they like, not just the £3,600 annual limit proposed by the government which, says Pitt-Watson, makes the government proposal unviable and unsound.

The RSA report also says that these personal accounts have to be invested in safe assets, so that people can be reasonably sure that their savings will be secure for when they retire. And with that in mind, there should be only a limited number of providers, who can guarantee such exacting standards.

Personal and portable pensions with simple rules and no complications? It sounds like a great idea. And it is. That is why Chile did it thirty years ago, and why it has already spread to dozens of countries round the globe. And it's why we did a report, The Future of Pensions on it as long ago as 1983.

It takes time for ideas to get through the sausage-machine of politics. But perhaps this is one that is just about to make it.

Now, if only we could get personal and portable health savings accounts too...

Welfare isn't working

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Further evidence of how ineffective our welfare system is at galvanising people into finding jobs can be seen on Channel 4 over the coming weeks. The programme 'Benefit Busters' (Episode 1 from Thursday can be seen here) follows the work of A4E as they attempt to return those on benefits to the workforce. The first episode focused on lone mothers as they undertook a 6 week course titled 'Elevate'. The company receives £100 per week per participant and a bonus should they find a job.

The programme shone a light on the unintended consequences of welfare. One participant openly stated that as benefit recipients, "they got too much for doing nothing" and that benefits, "did not give people the initiative" to act over their own lives. Even though they successfully placed the course's participants one lone mother had to go back on benefits due to the difference between a low wage job and a life on benefits. A politician view the latter problem and promptly recommend that the minimum wage be increased, there would be relatively few of them who would grasp the fact that taxes considerably eat into the earnings of the poor. Those in minimum wage jobs who can be rewarded with more money on benefits need to have their allowance levels raised so they are removed from paying tax.

We are paying for attitudes to work to be repaired following the damage that welfare has imparted upon its recipients. This is why we should be looking at reforming the welfare system (as we have suggested here in Working Welfare). The Channel 4 series continues next week looking at the long-term unemployed and examining their approach to life. From this series it is plain to see that government welfare destroys lives.

Pension fund problems

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Our Regulatory Evaluation Group (REG) held another of its successful lunchtime discussions yesterday, with Paul Thornton OBE (pictured left), head of Gazelle Corporate Finance. The theme was company pension funds – a topical subject in view of the worries about the sheer scale of pension funds that are larger than the companies that sponsored them – like the Post Office pension scheme – and those which have a huge deficit to match – like that of British Airways.

A particular concern for financial managers is whether the huge deficits that have opened up – following Gordon Brown's changes to the accounting and liquidity standards, and of course the effects of falling investment returns because of the financial crisis – are actually making mergers and acquisitions impossible. Already we have seen potential bidders walk away from a deal because the pension trustees have argued that a huge wodge of finance is needed to close their deficit.

In fact, there seems to have been a certain amount of gaming going on between pension trustees and company boards. By making changes to their funding assumptions, the trustees may well be able to increase their apparent shortfall and so scupper a takeover or merger that they don't particularly like.

Nevertheless, a lot of the deficits are all too real. And to some extent that is chickens coming home to roost as companies have underfunded their pension schemes during the good times. I would argue that pension funding requirements should be stated clearly on company balance sheets, so the potential liability is clear. Come to think of it, that is exactly the way the government should run the state pension, and all those index-linked civil service pensions, too. But of course they don't. The government's pension schemes would not even pass its own laws and regulations. Indeed, if the cabinet were private-sector pension trustees, they would all have been carted off to Pentonville Jail long ago. Now there's a thought to keep you happy in an impoverished retirement.

Marriage and the welfare state

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There is a rather interesting debate between Peter Hoskin and Fraser Nelson over at the Coffee House blog on the value of Conservative Party plans to use the tax system to encourage the institution of marriage. Following the lead of the Centre for Social Justice, there are plans afoot to encourage marriage via a £20-a-week tax break for married couples.

The exchange can be viewed, here, here and here. With the original post inspired by an excellent article by Philip Collins in The Times. Central to the debate is the efficacy and morality of giving tax breaks to encourage marriage. Peter Hoskin and Philip Collins win the efficacy side of the argument. £20 per week really won’t make much of a difference. This in turn makes Fraser Nelson’s defence of the morality of the scheme mostly redundant. Yet without other reforms the poorest are nevertheless incentivised to stay unmarried or pretend to be apart. However, rather than introduce more incentives to mitigate the unintended consequences of current policies, the Conservatives need to deal with the original government interventions.

This of course involves radical welfare reform as well cutting tax for the poorest. Alongside a flat tax, we at the Adam Smith Institute have long argued for raising the personal allowance to £12,000. With only basic welfare and a fair tax system the effects of welfarism that rightly concern Fraser Nelson and the Centre for Social Justice will be dramatically reduced, without the need to rely upon the state to try (and fail) to correct its own mistakes.

Charles Moore asks an interesting question

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And rather blows it, for the answer is in his question.

But I should like to concentrate on the non-economic elements of all this. What is the attitude of mind that has turned the most educated and prosperous part of the human race against reproducing itself?

It is also an entirely economic answer. The reason that the most educated and prosperous do not have great tribes of children is because they are educated and prosperous. We can see this in any indicator we like: whether it's average income in a country, the wealthier within a society, the richer people are the fewer children they have. The effect is even more striking for education of women: more years in school leads to fewer changing nappies. This much is simple.

But of course we want to know why this is as well. Why should anything from learning to read and write to a PhD in electrical engineering lead to women wanting fewer children? Why does having the physical wherewithal to provide a child with an entrancing life lead to having fewer? And it isn't just that children are a cost now as they weren't in peasant societies, as Moore mentions.

It is, I'm afraid, our old economists' friend, opportunity costs. The price of anything is not what we pay for it, it is what we give up to get it. The richer you are and the more educated you are the more glorious opportunities this modern world of ours gives you. You can travel the world, climb mountains, have a long and fulfilling career, run a major corporation, write novels, this globe of ours really is the mollusc of your choice. You can also spend some 30 years or so pumping out and raising (clearly, for men, only the latter) a series of five or eight children as our forbears did. But what you cannot do is all of them, choices have to be made.

The result of such is that given the multitude of choices available to the educated and prosperous fewer such are deciding to have children. That's pretty much it.

Poverty, charity and the state

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Brown will reduce child poverty by making all families equally poor, while Cameron will take politics out of social action by putting the Conservatives at the centre of it. Where can one turn to for some logical thinking on poverty, charity and the state?

Certainly not to What are the implications of attitudes to economic inequality?, a report from the Joseph Rowntree Foundation that gives voice to a number of think tanks discussing economic inequality. Take the Fabian’s contribution for example. They cannot decipher the following facts: most people are not keen on an unequal society, but people do not want income to be redistributed and they certainly don’t want the government involved in this.

This for the Fabians is a political paradox. But it is only their paradox. Many people are not keen on inequality because people have sympathy for others and do not want to see fellow humans having a tough time of things. However, they don’t want to redistribute money because they prefer to look after their family and do not think simply giving money and resources to others is a real solution. The reason people don’t want the government involved is because they realize how inefficient it will be and because it has a bad record on this.

When will politicians follow the public’s instinct on this one? Gordon will bankrupt us to end poverty, while Cameron will destroy honest charities with the stink of politics. It is the choice between dumb and dumber.

Dealing with pensions the Danish way

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Whisper it gently but there are a number of things worth copying from the social democracies of the Nordic countries. Sweden has school vouchers, no inheritance tax and no national minimum wage. Denmark has low statutory labour protection, meaning a more flexible workforce. And now, from the Economist, I find that Denmark is the first country to really grasp the pensions nettle.

So far only Denmark has taken the radical step of indexing the pensionable age to life expectancy.

This has to be the way to go, even Brad DeLong, no rightist he, has been known to advocate the same thing. The pensionable age should be set at the average age of death of the previous age cohort.

The basic and simple problem is that current pensionable ages were set when everyone was living rather shorter lives. When Bismark started the state pension you would have to be lucky to reach pensionable age. When Lloyd George started ours you'd have to live longer than average to get it. Now you'll be unlucky if you don't reach pensionable age, although obviously there are some through illness or accident who do not.

With ever increasing life spans this simply cannot go on. We need to work for more years, that's it. You can of course do what you want with whatever savings you have made and good luck to you, but as far as the State is concerned there is no reason why a hale and hearty 69 year old should be consuming the taxes of those still in the labour force. As above, raise the pensionable age to that of the average age at death of the previous age cohort. That would mean around 77 for men, 81 for women as things currently stand. Return the State pension to what it was always supposed to be, social insurance against outliving your rational level of savings.

Of course, there will be criticisms of this. Does Worstall really insist that we must all work until we drop?

No, only that half of us should.

Public sector ineptitude

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The DWP (Department for Work and Pensions) announced yesterday that the amount of five key income related benefits that went unclaimed rose to £10.5bn in 2007/08. While it is perhaps sobering to know that there are those out there who do not feel the need to rely on the government to survive, we also have to bear in mind that the unclaimed money won't be coming back to us anytime soon.

For many of those non-claimants, especially the pensioners, the money that is currently rotting in government hands is in fact their own that they lost through being forced to pay taxes. The government over the past 12 years has created a monster: a complicated tax system and an incomprehensible benefits system. The simple approach of setting free all of those who are low-earners by raising the allowance would of course render a huge number of civil servants redundant, but at least they'd understand the claims system. This is the approach that is needed to tighten up wasteful spending by government and to assist in lowering the burden of taxation.

The unclaimed benefits numbers are further compounded by the fact that the level of fraud/over-payment continues to remain around £2.7bn. There are also underpayments of around £1.2bn. All of these figures represent why the public sector should not be handed our money to dish out on the whims of politicians. And why the system as it currently stands is in serious need of a simplifying overhaul.

Failings of the points-based migration system

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Students are not the only people hurt by the UK’s points-based visa application system. Non-EU citizens who seek employment in the UK are also disadvantaged. The government intends to accomplish three objectives with the new migration control system. First, Gordon Brown’s government wants to curtail the number and type of non-EU citizens working in the UK. Second, the government wants to keep visa holders off the dole. The third government objective is to raise money from visa applications.

The first objective has been publicly stated by the Home Office. The second objective is revealed through a review of the new visa application forms. The points-based system requires all visa applicants to have sufficient funds to support themselves, and any dependants, throughout their stay. Applicants also certify that they will not receive welfare benefits whilst in the UK. The third objective is manifest by hike in visa application fees. For example, unsponsored visa applicants must now pay between £675 and £1020 for the application fee. Sponsored applicants must pay a £265 fee. Even students are required to pay £145 to apply for a visa. Applicants in these three categories who have dependents must pay the same application fee for each dependent. Visa application statistics are sparse for the period since the points-based system was launched, but in the 2006–2007 financial year, the UK government received 2.7 million visa applications. That translates into millions of pounds of revenue for the government.

The concerns underlying the government’s objectives can all be traced to the maladies of the welfare state. Welfare states attract people who are content to live on the dole. The new points-based system cracks down on would-be social loafers from non-EU nations, but European freeloaders are left undeterred. This is especially problematic due to the combination of the UK’s high standard of living and relatively generous welfare benefits. Welfare states are also expensive to run, which explains the high taxes and government fees.

The easy way to eliminate the government’s welfare-based concerns is to do away with the welfare system. That may not be politically practicable at the moment, but an effective compromise would be to pare down welfare benefits to the point that the UK’s dole is much less desirable than welfare programs in other EU nations. This will encourage net negative residents to look elsewhere for government handouts. With fewer freeloaders, many of the government’s immigration concerns will be allayed. The Home Office could then relax its points based system rules to make it easier for industrious, innovative applicants to make positive contributions to the UK economy.