Granny mugging

Nick Petford, vice-chancellor at the University of Northampton, wants to take money from law-abiding pensioners and savers in order to give it to convicted criminals. In the spirit of the times, let’s call it granny mugging.

To be precise, Prof  Petford is urging British universities to use at least £1 billion of their annual £7 billion procurement budgets by purchasing from “social enterprises” as part of a campaign called £1 Billion University Challenge whose objective is a “fairer society.” Prof Petford described social enterprises as companies where profits are reinvested in the business rather than paid out as dividends. As an example, he cited buying furniture from Goodwill Solutions which employs ex-offenders.

Clearly, to Prof Petford and many like him in the ivory tower, dividends are a bad thing, conjuring up visions of fat cats sucking on cigars while gathered round a big table covered with stacks of cash. Perhaps a better understanding of dividends is in order.

Companies are in business to make a profit. If they’re successful, they then pay tax on those profits, commit some of the balance to further investment and pay out the rest in dividends. Those dividends are earned by folks who risked their capital in the company in the first place and those folks have to declare those dividends as taxable income. What they do with what’s left can vary – re-invested in the same company, invested elsewhere where returns might be better or spent on a good night out.

Many of these folks in receipt of dividends are pensioners or savers with an eye to their retirement. They either hold a company’s shares directly, perhaps through an ISA or SIPP, or more likely through a mutual fund or through their participation in a pension scheme. Indeed, Prof Petford’s own cushy pension scheme is greatly dependent upon a lot of dividends being paid to ensure his comfortable retirement.

Now, we have no problem with social enterprises if they can provide a good product at a competitive price – that’s what a free market is all about. But Prof Petford then wants to play fast and loose with other people’s money (ie taxpayers’ and tuition fee payers’) by admitting that restricting some procurement to social enterprises would cost “a bit more” but is counting on reaping big social rewards in a couple of years.

What about the “social” rewards from profitable companies hiring lots of workers and paying lots of dividends to the nation’s grannies while producing ever better and cheaper products?

Unravelling the minimum wage

A report out yesterday said that in real terms, the minimum wage in the UK has lost much of its value. That is making life really hard for the people who have to live on it. Both statements are true, but there is a wider picture.

First, the minimum wage only helps those who are actually in work. Their wages have to be higher than they might otherwise have been. But minimum wages do nothing at all to help people who do not have a job and so don't have a wage — indeed, they help to create this situation in the first place. And there are millions of those, including around a million young people.

Indeed, minimum wages make it harder for jobless people to find a job. Particularly young people without experience, other people without skills, not to mention women and ethnic minorities against whom employers commonly discriminate. It has a particularly bad effect for young people, without job experience or who lack skills or the habits of work. Quite simply, they not worth so much to an employer; and if employers figure they are not worth the minimum wage – plus national insurance, pension benefits and everything else that has to be added in to the employment bill – then they simply won't get hired.

Many young people are prepared to work for less than the minimum wage simply in order to get some experience and to have a positive reference on their CV. We see that all the time with Parliamentary interns, whom MPs are very willing to take on as unpaid dogsbodies. And for hundreds of years, apprentices have been paid little or nothing, but have struggled along anyway because they knew that they were learning a trade. When we raise the minimum wage, we prevent these people being taken on at all. So they don't learn a trade. They learn how to live off benefits, which is exactly the wrong lesson.

International studies show that minimum wages have a negative effect on employment, and are associated with worse terms and working conditions – since tightening terms and conditions, or spending less on the work environment, is one way that employers can offset the extra cost imposed by the hourly minimum. And that it is young people and minorities who are worst affected. For years, such effects have not been obvious in countries like the UK, where we enjoyed a massive boom on the back of reckless government borrowing and cheap money policy. But now the party is over, the effect is all too obvious, as a million young people will tell you.

When you fix prices, you get shortages. By fixing the price of labour too high, the minimum wage causes a shortage of jobs. It is hardly a difficult thing to understand.

It may sound harsh, but we should scrap the minimum wage. People working in minimum-wage jobs won't thank you – though the reality is that employers must think those workers worth the minimum wage rate or they would not hire them. The people who will benefit are those who at the moment cannot break into starter jobs and get their first foot on the career ladder, and who would be willing to work for less. Who are exactly the sort of people that the minimum wage was meant to help.

Pension pots of gold

Large pots of money invariably draw politicians like bees to honey, especially when those bees are already sucking dry every other pot in sight.

A few weeks ago we praised the idea of doing away with Britain’s current pension arrangements in favour of a simple large annual ISA allowance from which money could be taken tax free at an appropriate retirement age. Our big concern was the obvious temptation for politicians to swarm around these ISA pots and fiddle away their simplicity over time.

Now comes news that 34 London councils are discussing merging their various pension schemes into one giant fund to reduce administration costs. On the face of it, this sounds like a reasonable proposition to create a fund with some £30 billion of assets. Proponents of the scheme point to the Ontario Pension Board which manages the pension savings of government employees for Canada’s largest province.

However, the flashing red light in the London proposal is the suggestion that the new fund could direct as much as 7.5% of its assets into local infrastructure projects. Oh, oh! Is that the sound of swarming bees?

Indeed, it is. Boris Johnson, the King Bee of London, is shameless in his intentions. “What London needs is a serious infrastructure investment fund,” he is quoted as saying. “It is mystifying that these pension funds are sitting on huge quantities of British assets and investing them around the world. And not here where they would get a fantastic return.”

Bzzzzzzz. Let’s take that one apart. “Mystifying?” There’s nothing mysterious about pension funds fulfilling their duty to get the best possible return for their prospective pensioners. “Fantastic return”? If London infrastructure was just that then the funds would already be investing there.

And this is just good ole Boris talking. Imagine what a really serious statist would do with such a big pot. If there was a lesson from Robert Maxwell it was that pension funds shouldn’t invest in their employer – that just doubles the risk to the employee.

Looking at the Ontario Pension Board’s investment objectives, it’s all about security and acceptable risk, not dedicating specific funds to politicians’ latest wheeze. Indeed, about a third of its assets are in Boris’s “around the world” equities. Then it’s the usual prudent mix of Canadian equities, real estate and government bonds.

So, by all means, go ahead and merge the London council funds to benefit from economies of scale but don’t go telling them where to invest, especially not in your own pet projects. That really would be a granny tax.

A free market take on the 2012 budget

Generally positive on tax…

• Cutting the 50p tax rate to 45 percent is a step in the right direction, but the Chancellor should have scrapped this altogether. The danger is that the 45p will become a permanent rate. The government should commit to scrapping this new top rate tax before the next election.

• Raising the personal allowance to £9,025 is also very welcome. The government should raise its target from £10,000 to £12,400, which would lift minimum wage earners out of tax altogether.

• The government’s commitment to merging income tax and national insurance is very encouraging. Britain’s tax code is absurdly complex and tax simplification should be one of the government’s top priorities.

• The ‘tax receipt’ idea could make a big difference. By making spending more transparent, people will be better able to hold the government to account for its fiscal policies. With a bit of luck, these tax receipts could sow the seeds of a small government revolution as more people realise how wasteful government spending really is.

• The additional cut in corporation tax is a good, pro-growth measure that will boost Britain’s economic competitiveness. But it should go further – competing with large countries is not enough anymore, and a corporate tax rate higher than 20% is still too high. Furthermore, the new and/or expanded allowances and tax credits the chancellor announced will increase complexity and run against the general theme of tax simplification.

But there are a few negatives on tax too…

• Raising tobacco duty by 5% above inflation is petty, vindictive, and possibly self-defeating. Such taxes are already extremely regressive, hitting the poorest the hardest. Moreover, high levels of tobacco duty are already encouraging smuggling and counterfeit cigarettes. Cigarette smugglers will be very pleased at today’s duty hike.

• Reducing the 40p rate threshold will mean that only basic rate taxpayers will benefit from the personal allowance rise. Up to 300,000 people will now find themselves upper rate taxpayers as a result. This will hit single-earner families particularly hard.

• The General Anti-Avoidance Rule is a bad idea. It leaves far too much latitude for bureaucratic discretion. It adds another layer of complexity on our labyrinthine tax code. And it is an affront to the rule of law. Radically simplifying taxes is a much better way of ensuring people pay their fair share.

• Raising Stamp Duty Land Tax on homes worth more than £2m is a politically-motivated sop to the Liberal Democrats. Taxes like stamp duty are damaging because they discourage transactions and gum up markets. They also raise very little revenue.

The budget is weakest where it strays into industrial policy…

• Was the tax credit for animation, video games, and high-end TV production designed just so the Chancellor could make his ‘Wallace & Gromit’ joke? These are unquestionably attractive, wealth-creating industries, but the government should not be picking winners and advantaging politically-favoured businesses over less fashionable ones like this.

• In promising to fund superfast broadband in 10 British cities, the government is creating a role for itself where it just isn’t needed. Over the past two decades, the private sector has delivered (and continues to deliver) a vast digital infrastructure at virtually no cost to the taxpayer. It is hard to think of a better example of something the state should simply stay out of.

• The Chancellor’s call for increased airport capacity in the South East is a good thing, but it is worth remembering that the politically-motivated rejection of such airport capacity has been explicit government policy up until now.

• The various credit, business, and construction support schemes contained in the budget are misguided, and will do little except preventing markets from adjusting to changed economic circumstances, as they must if we are to return to robust, sustainable growth. Nevertheless, these schemes are probably small enough to be dismissed as pointless gimmicks rather than serious market distortions.

The macro outlook is worse than the chancellor is letting on…

• The growth forecasts the chancellor announced still look implausibly optimistic. The public sector, financial industry, and housing/construction sectors all boomed unsustainably in the 2000s, and must probably contract further as the economy rebalances. We are weighed down by debt, and the deleveraging process has barely started. So in the absence of significant and radical supply-side measures to boost growth in the rest of the economy, it is hard to see how these forecasts can be met. And that’s before you even consider the sizeable downside risk posed by the eurozone crisis and our still-fragile banks.

• The government’s borrowing costs are low not because of the chancellor’s fiscal rectitude, but rather because the Bank of England is directly intervening in the gilts market to reduce borrowing costs via quantitative easing, and because things in the eurozone are even worse than in Britain. The economy may be getting better, but the overall macro-economic picture remains far worse than the chancellor is likely to admit. 

• Finally, it is worth remembering that for all the talk of austerity Britain, the government will still borrow £126bn this year. That’s £14.5m an hour, every hour, all year long. 

Pensions redux

Remember pension tax simplification in 2006? At the time, it seemed like a reasonably good idea - reduce the patchwork of legislation built-up by successive governments to encourage retirement provision by simplifying the previous eight tax regimes into one single regime. But as with all national schemes, politicians can’t leave well enough alone and the tinkering with simplification began from day 1. And it just won’t stop – we can expect the Chancellor to fiddle some more come the March budget statement.

Throw in a history of scandals like Robert Maxwell, pension mis-selling and exorbitant fees and it’s little wonder normal folk are confused and suspicious, not to mention hugely reluctant to save.

But, lo on the horizon, rides Merryn Somerset Webb, editor-in-chief of Money Week and columnist for the Financial Times money supplement, with a battle cry to do away with the whole bloody mess.

In short, here’s her plan: “Abolish the pension system. Increase the annual ISA limit to somewhere around £30,000, with some kind of lifetime contribution limit included too. Make a big deal about how the money comes out entirely tax-free. Not having to pay tax on my income when I am old is an attractive option to me and I bet I am not alone.”

Ms Somerset Webb already anticipates some objections. Some will worry about liberated pensioners blowing it all in Las Vegas but she suggests a requirement to keep an age dependent minimum in the ISA. Others will cluck-cluck about the impact on public finances but Ms Somerset Webb suggests the Treasury “could amuse itself” with a one-off levy on all pension holdings to convert them into ISAs and believes the savings on pensions tax relief should compensate for the lack of income tax from ISA investments.

The proposal’s beautiful simplicity, of course, makes this a tough sell – there’s just too many vested interests keen on making things complicated: politicians who need fiddly toys, treasury officials aghast at losing buttons to push, financial advisors needing someone to advise, bankers flogging incomprehensible products.

And then there’s the problem with all proposals to simplify any tax regime – overwhelming inertia to undertake such efforts and an irresistible urge to keep changing the rules. How could  savers be confident Mr Somerset Webb’s new regime would outlast their days on this planet? It was just a blink of the eye before tax simplification became a standing joke.

Still, Ms Somerset Webb has floated a brilliant idea and could be taken a step further - if we’re going to think big - by ending company sponsored and managed pension schemes. Employers would simply make contributions directly into an individual’s ISA account at some basic minimum rate, say 8%, or more if they want to attract and retain good staff. Companies would be freed from a tiresome cost and employees would benefit from a seamless and portable savings plan independent of their employer.

Could the nation cope with so much simplicity?

An alternative approach to unemployment

Last week’s joblessness figures were hardly encouraging. The Chartered Institute of Personnel and Development predicts a gloomy forecast for employment prospects, forecasting unemployment to reach 2.85 million by the end of 2012. Their Labour Market Outlook makes for very miserable reading for those seeking jobs. Similarly, research from the TUC suggests that ‘unemployment’ may be at around 6 million if those in temporary work or underemployed are taken into account. The TUC has applied the US U1-U6 system of measuring unemployment.

Of course, we should take the TUC’s research with a good pinch of salt. The TUC has taken the broadest possible measure of unemployment, naturally, as it wishes to criticise government policy. The TUC does not give a great deal of detail about the source data it used – it simply states that they are derived from the ONS, so it is not easy to critique its methodology, aside from the general criticisms that must be attached to the US system. These figures do not allow for revealed preference; individuals may state that they are willing to work full time but actually may not to do so if a full-time job were available. If nothing else, the TUC’s presentation is misleading as the US figures expressly contain six different types of ‘unemployment’, so to pick one (U6) and present it as definitive is disingenuous in itself.  

These caveats notwithstanding, unemployment is clearly high and rising by most measures and there is a considerable level of underemployment within the economy. The TUC’s answer is, of course, government ‘stimulus’ and job creation schemes. Regardless of the fiscal impact of further government stimulus, it is unlikely that it will be successful. We have a huge fiscal stimulus already in place and pre-existing job schemes have repeatedly failed – the underperformance of the government’s Work Programme is merely the latest in a long line.

What comes across far more strikingly from these figures is the very high level of structural unemployment in the UK, prior to 2009, something that the TUC entirely fails to mention because it does not fit its picture of ‘demand deficiency’. In April 2005, firmly within the boom years, official unemployment (U3) stood at 1,437,000 (roughly 4.5% of the active labour force) and the broad figure (U6) at 4,184,000 (13.5%). Why then, in the midst of an unprecedented boom and with an acknowledged shortage of skilled labour, was there so many unemployed and discouraged workers in the economy and did the markets fail to clear?

Unemployment is a complex phenomenon but it is clear that a great deal of the UK’s unemployment is unrelated to demand and is, in fact, a result of structural factors. The solution to this sort of unemployment is supply-side reform, of a far more radical sort than the present government is proposing: eliminating – or at least ‘regionalising’ - the minimum wage, reducing employment regulation, lowering and flattening taxes on income and employment and eliminating high marginal tax rates caused by the tax and benefits system. It is also clear that the state education system is utterly failing to equip many young people with the skills that the job market requires. Obviously, many of these reforms are long-term and would require much effort on behalf of the government in the face of entrenched interest-group opposition. However, the present government is not only missing much low-hanging fruit or taking little action but is actually creating further supply-side problems. 

In terms of the discouraged and temporarily employed, the TUC fails to recognise that the prevalence of this is the result of government-created barriers to permanent employment. Temporary employment is not, in most cases, advantageous for employers. The means to re-engage workers and encourage permanent and full-time employment is to de-regulate and eliminate the disincentives for employers to hire workers, not to apply the same restrictions to temporary employment which will merely serve to drive such employees out of work altogether.

Generally speaking, the Coalition government has tended towards the TUC’s approach – stimulus and work programmes – far more than it has to supply-side reform. This is profoundly disappointing, especially given the clear evidence that much of the UK’s unemployment is structural and bears little relation to the cyclical environment.

It's complicated

Last week, BBC Radio 4’s PM show each day profiled an unemployed person. On Friday, it featured Leanna Brown, 20 years old, a single mum of  a two-year old, living in Sheffield and unemployed for two years.

Ms Brown said she lives in council housing for which she pays £7 a week rent, gets £100 every two weeks for income support, child tax credit of £60 a week plus unspecified child benefits. She earned nine GSCEs, tried for A-levels but didn’t like it, took a course as a nail technician and now has ambitions of being a youth worker. She said her gas and electric bills come to £60 a week.

Ms Brown says she’s diligent about seeking work with regular visits to a local employment agency and the local Job Centre. She’s frustrated and increasingly depressed from her situation, so much so that she’s lost four stone in weight over the last few months.

Commenting on her case, Jonathan Portes of the National Institute of Economic and Social Research described her situation as “quite typical” and “not her fault”. He said it was a “failure of macro-economic policy rather than anything specific to the individual.”

Well, not so fast. It’s a sad tale indeed and there’s little doubt her immediate prospects are bleak but to blame it all on macro-economic policy misses the point that the macro-economy is nothing more than the sum total of micro-policies and individual decisions.

This admittedly comfortable, free market loving, big government fearing, libertarian worries about the Ms Browns of this world but has a lot of questions before pulling any macro-economic levers. After all, Gordon Brown did that for years – throwing huge sums of cash at any and every problem.

So let’s start with the big elephant in the room, an issue not addressed in the PM profile. Why is Ms Brown a single mum? She said she “didn’t plan the pregnancy” but she clearly also didn’t plan well to not get pregnant. In this day and age, how are we still churning out pregnant teenage girls and then fretting about their resulting situation?  Whatever amount of money our schools spend on sex education is clearly a waste as Britain’s woeful teenage pregnancy rankings in the world attest.

Where’s the father of Ms Brown’s child in all this? And what about any other family of Ms Brown? Neither comes up in the PM profile as if they’re irrelevant to Ms Brown’s situation. Study after study shows that nothing enhances prospects in life as well as a strong family yet our welfare micro-policies are failing to encourage them.

Ms Brown’s initial aspirations as a nail technician and now as a youth worker also raise eyebrows. Is that the result of wise advice from our legions of counsellors? Nobody suggested more broadly useful skills like proficiency with Office software or elementary bookkeeping or food catering?

And what about that £60 a week for gas and electricity? That’s about 2/3s more than what we spend on a four bedroom detached house so either Ms Brown’s flat is really drafty or she keeps all appliances and lights on at all times or the number needs challenging. And if she does indeed spend that amount which micro-economic policies are keeping these utility prices so high? Wind and solar subsidies? Foot-dragging on shale gas development?

To PM’s credit, they also had the upbeat Paul Brown from the Prince’s Trust to comment. He noted that 1-in-5 unemployed youth means 4-in-5 are finding work and pointed to his charity’s success in steering many of this nation’s Ms Browns into a good place. The record of focused charities is far better than the welfare state’s so the more outsourcing to them, the better.

Ms Brown’s case is a tough one. She’s been let down by any number of government agents and by her own mistakes. Blaming it all on a failure of macro-economic policies misses the point – it’s more complicated than that.

Beware workfare

Workfare — the policy of tying benefits to work programmes — has come under scrutiny this week as an unpaid position at Tesco was advertised in a workfare programme. The position was originally advertised as being permanent (which Tesco says was a human error), causing some to accuse Tesco of using "slave labour". Of course, this is silly hyperbole — real slaves didn't have a choice. But even so, I'm deeply sceptical about the concept of workfare. It strikes me as a tenth-best approach to welfare reform, and may even be worse than the status quo.

Government interventions in the market should aim to distort things as little as possible. Government is short-sighted, bad at handling information, and subject to incentives that rarely line up with those of the public at large. And workfare has the potential to be massively distortional. By requiring government officials to decide which jobs are worthwhile and which aren't, workfare acts as a form of central planning of the labour market.

It's extremely unlikely that governments know better than individuals what is best for those individuals. Yet workfare assumes exactly that. Assuming that people on benefits are too stupid to make decisions for themselves is a Victorian-style paternalism that also underlies the health fascism of minimum alcohol pricing and plain cigarette packaging laws.

The mistake behind workfare is to assume that everybody who is unemployed is idle. Yes, some are. But many are either looking for work, or reskilling to work in jobs that require new skills.

An example might be of a computer programmer who is an expert in the Java programming language. Suppose some new advancement means that her Java skills are no longer in demand on the market. A good path for her might be to teach herself a new language, to build on her existing skills and eventually find a new, skilled job. This would be vastly better for her and the rest of us than if she ended up working an unskilled job flipping burgers at McDonald's. But it is very possible that workfare would do the latter, failing to distinguish between our actively unemployed programmer, and the idle unemployed people it is aimed at.

Some of workfare's supporters point to provisions it makes for retraining, but this is naive and simplistic. Retraining is basically a form of individual entrepreneurship — trying to anticipate unfulfilled demand in the labour market and meet it with new services. It is a highly individualistic activity that is difficult to categorize and is contingent on each person's interests, skills and experience. The government can't direct it with any hope of success; when it tries to it will inevitably get things wrong. The overall effects may be that workfare pushes potentially skilled workers into unskilled jobs, and mangles the market signals that the unemployed would otherwise be responding to.

There's something deeply unpleasant about the government-corporate relationship that workfare is based on. Firms have to be approved by the government to qualify for the scheme, and as usual it's large, established businesses that can navigate (and maybe manipulate) the state's rules most effectively. Workfare isn't slavery, but I'm not happy with a system that predominantly supplies privileged businesses with artificially cheap labour, paid for by the state.

The empirical evidence isn't encouraging either. A 2008 report by the Department for Work and Pensions found that "there is little evidence that workfare increases the likelihood of finding work" (h/t Daniel Sage). Workfare's supporters point to Wisconsin's "Wisconsin Works" programme, which did reduce long-term unemployment when it was introduced in the 1990s. But, in the first big recession since its introduction, Wisconsin's unemployment rate has been roughly in line with the national average, and is unremarkable when compared with similar US states:

But there is a problem with long-term unemployment in Britain and, even if workfare won't help, the status quo isn't much better. No wonder unemployment is so bad — minimum wage laws effectively ban unskilled (read: low paid) jobs. That means that people cannot get on-the-job training and skills unless they take unpaid internships or work experience. The bizarre result of the minimum wage is that Tesco can hire people for £6.08 an hour, or £0.00 an hour, but nothing in between. Combined with the fact that working means you have to forgo benefits that may be worth more than your wage, it's hard to think of policies that could make long-term unemployment more attractive.

There is a solution that could appeal to a broad base of people and fix most of the broken incentives that unemployed people face:

1) Abolish the National Minimum Wage so that unskilled jobs can be created. This will allow more "first foot on the ladder" jobs to be created and give unskilled people a way out of unemployment.

2) Replace benefits with a tapering income subsidy, similar to the government's Universal Credit, which would supplement the incomes of people on low wages. This should be generous, to persuade some supporters of the minimum wage (who, wrongly, think that it creates some kind of minimum living standard for people) to accept abolition of the minimum wage.

3) Reduce the income subsidy over time — say, a year — so that the initial safety net provides security to people who have been recently made unemployed but does not allow for long-term dependency on welfare. 

Workfare is a misguided, statist attempt to fix a problem made by government. By adding even more planning and state control to people's lives, it will end up causing more problems than it solves. Unemployment can be addressed, but only by removing government barriers to work, not by adding on more layers of state involvement in people's lives.

Don't abolish the pension, abolish the pension age

Once, when I was on the radio during the autumn’s public sector trouble, a teacher representing the trade union activists who were due to go on strike at midnight that night countered one of my arguments by saying that he was striking for “people like me”. By this he meant ‘young people who are going to have to work longer than us for smaller pensions.’ The thing is, I couldn’t see any injustice in my generation having to work longer. We’re going to live longer, too. It is absurd to suggest that the generation graduating university in 2011 should be expected to retire at the same age as people who entered the job market in the Sixties and Seventies.

Yet that is precisely what this man was proposing: regardless of advances in life expectancy and medical science, each generation should demand to spend no more time in work than the preceding one and each should enjoy a longer and longer retirement. With life expectancy increasing, it is likely that most people my age will never be able to afford a worthwhile annuity and will be working into our seventies and eighties, maybe our nineties.

Will that be so terrible? In the half century between now and then medical science will have advanced in leaps and bounds. In all likelihood our seventies will be as unrecognisable to the baby boomer generation as their fifties and sixties are to their own parents. The fact is that science is keeping us younger longer, yet we cling to a model of social provision that was designed in the late Forties. The pension was designed to be a small boon to carry people from the end of their working lives to the grave; less a safety net than a stretcher.  It was pitched at roughly the age when people of that era who survived that long were physically incapable of work.

Yet as our life expectancy grew and employment patterns shifted away from manual labour, we invented the concept of a long retirement as our lifespans came to rapidly outstrip the pension age we refused to change. Such pensions are vanishing from the private sector, and as financial reality bites their public sector equivalents will go the same way. We’re living too long to afford them.
The solution is that the government must fundamentally rethink its approach to pensions. It should shift from being seen as an entitlement you reach at a certain fixed age and become a benefit tested against an individual’s personal circumstances.

In short, the very idea of ‘the pension age’ should be abolished. State pensions should become a benefit and be seen as such – when age renders you unable to work, you receive the pension as an out-of-work benefit if you cannot get by on your own means. People would still be free to contribute towards a pension, but with increasing life expectancy annuities are only going to get more prohibitively expensive.

This will hurt. But the era when the British public could use borrowed funds to bridge the gap between acceptable taxation and expectation is over.

The cost of the benefit cap

The BBC has an article today that shows the harm that the benefit cap would do to an average family on benefits. The graph, above, summarizes their income and expenditures.

It's distressing enough that Ray, the father of the family, can say "The market for my skills dried up 10 years ago - there's a total lack of work in my area of expertise [educational software writing]". In that ten years, has he tried doing something else? He also says, "I see eight people here having to choose between eating or heating." Grim stuff, but is this true?

£82.40 a week is no small sum, but look closely at what those expenditures include: Sky TV, 24 cans of lager, 200 cigarettes and a large pouch of tobacco. Frankly, I find it unbelievable that a family of eight could spend £240 a week on groceries without being able to cut down, but let's leave food expenditures aside, along with the nebulous categories like "entertainment" and "shows". Here are the weekly costs of just this family's luxuries:

Sky TV - £15

24 cans of lager - £20

200 cigarettes - £70

Large pouch of tobacco - £12

Total - £117

If they're choosing between "eating or heating" without thinking about cutting the above expenses, well, OK. Some people have unusual priorities, and good luck to them. I'm in favour of as many people as possible who want to smoke doing so, if only to annoy the health fascists at ASH and the BMA. But that's not something taxpayers should be paying for.