Monday, 13 December 2010

Benefits reform - it isn't easy

(Click on the table for a larger presentation)

Last fiscal year, social expenditure in the UK amounted to £141 billion. You might think that this is a monstrously large figure in desperate need of being reduced.

It isn't so easy.  At least half of it goes on pensions expenditures (state pension, pension credits and winter fuel payments).  Housing benefit takes up around  £20 million.  Everything else is, comparatively speaking, small change. 

Benefits expenditure has also been growing rapidly in nominal terms.  Since FY03, most benefits have increased by well over 50 percent. Even allowing for the embedded inflationary component, this is an astonishing rate of growth.

The central problem is population ageing.  Within the next 15 years, pensions expenditure will start to rise very sharply.  At the same time, the number of active workers available to pay taxes and finance this expenditure will fall. 

Even if the government hauls back expenditure on non-pension items such as housing benefit, the growth of age-related expenditures will quickly eat up those savings.

Benefits reform - good luck with that.


dearieme said...

The alternative is to accept that benefits reform is essential since otherwise the state is utterly bust. Personally, I was appallled to find that I was paying income tax so that some people get more housing benefit per year than I get income. I think government(s) need not just macro decisions but also to set in train detailed investigations of individual entitlements. The fact that the latter would be carried out with the galumphing incompetence of government workers doesn't make them avoidable, unfortunately.

AntiCitizenOne said...

As you probably know, I'm a Georgist.

The best reform is to abolish the "welfare" state and pay a citizens dividend.

It sorts out the pensions problem.
It sorts out the Housing Benefit problem.
It sorts out the failure rewarding problems of the "welfare" state.
It sorts out the success punishing problems of the "welfare" state.

Mark Wadsworth said...

What AC1 says.

a) Also, the truth of the matter is that welfare & pensions spending is actually about £300 billion if you include the notional value of tax free personal allowance + tax breaks for pension savings.

b) This is approx = to the total amount spent by the government on subsidies to and procurement from nominally private sector businesses.

c) And then there's £200 billion odd in public sector pay and pensions.

We could easily cut b) and c) by half or two-thirds and nobody would notice the difference. Cutting (a) which is not 'spending' it is 'transfer payments' is the last thing we should be doing, albeit it needs to be simplified a lot (as AC1 explains).

Sobers said...

I liken the benefits system to a group of people pushing a cart up a hill. The weak and ill are in the cart. Initially there are lots of fit & healthy people to push and few riding. The burden is easy on each pusher as it is spread widely. Those being pushed are obviously in need of assistance, and the pushers can see they need the help.

Then slowly more and more people get to be in the cart, rather than pushing. Each time the burden on the pushers grows slightly more. Each time those getting in are slightly less and less needy.

Eventually the pushers will be outweighed by the carried, and exhausted, the pushers will be overcome by the weight of the cart. They will have to stop and let the cart go, condemning those in it to destruction at the bottom of the hill.

The logical thing to do, if you were GENUINELY in favour of helping the poor/sick/needy would be to limit the numbers in the cart, for their own good. Because it won't help them much if they are killed in a crash later.

But we are a democracy, so the numbers in the cart grow inexorably. Every time a new category of people is added to the list, anyone opposing it is decried as a heartless evil person, denying the 'poor' their 'rights'.

You cannot reform the benefits system in a democracy until the money runs out. Then and only then, when the abyss yawns in front of you, can the appropriate decisions be made. And it is entirely possible there will be idiots always prepared to say 'Thats not really an abyss in front of us, its an illusion, we can carry on as before'. And we may end up in the abyss anyway. In which case the benefits system is a rather moot point, when its every man and woman for themselves.

AntiCitizenOne said...

I thin it's more akin to a group of climbers roped together climbing up a mountain until one of the group decides they dont need to climb they can get the other climbers to pull them up...

Eventually everyone falls off, unless you cut them free from you.

Anonymous said...

Alice, have you heard of Aubrey de Grey?

He is a scientist working on "Anti Aging" he believe some people alive today may live to be 4000 years old.
This is not a joke, he has a PhD from Cambridge, etc.

If you think we have an 'aging problem' now, you aint seen nothing yet :) .

Actually the 4000 years old is a bit of a pie in the sky figure.
What he is actually saying is that life expectancy has increased about 1 year every 7 years over the last 100 years or so, but that this process is speeding up and he eventually believes life expectancy will increase by 1 (or near 1) every year, at which point humans will reach 'escape velocity'.

Now, the point is, living longer is not the problem, and many people would like to live longer.

The problem is people want to live longer and continue to retire at the same age as before.

Originally when pensions were introduced people were only expected to live maybe 2-3 years (I forget exact figure) on that pension.
Now, people retire at 60 and many live to be 90+.
All my Grandparents lived to be 88/89, one still alive.

I was in hospital about 10months ago, met a lady who i thought was maybe about 65, could hear good, talk good, walked very well, Brain appeared fine to me.
She told me she was 96... she wasn't like a little old laby, she was standing tall.

Pensions should not be a sacred cow.
The retirement age should be moved to about 70 right now, and increased in the future.

There is also a lot of room to move in the other benefits.
As Richard North points out there would be no need for a winter fuel payment if not for all the enviroment legislation forcing up prices.
The government takes away with one hand and then gives with the other and pretends they are doing you a favour.

Anonymous said...

How does citizens dividend work?
how do you decide who gets it?
Surely you couldn't just give to anyone otherwise you'd have a mass wave of immigrants.
What about serious criminals? and banksters.

Yet if you tried to restict it, people argue it wasn't a fair citizens dividend.
I can see it escalating out of control just like the benefit system we have now.

AntiCitizenOne said...

Every British Citizen get an equal citizens dividend (funded by a single tax on Land). Prisoners would probably get billed for their prison place...

The numbers of immigrants would be restricted and citizenship would be auctioned to maximise income.

Asylum would be funded by charity not extortion.

Anonymous said...

oh and another thing.
We have to look at both sides of the equation in these things.

Many people argue that Housing Benefit primarily enriches landlords, and keeps the price of housing high..
Scrapping it might actually be to peoples advantage.

Alice Cook said...

I enjoyed reading these comments.

I am going to come back to this theme regularly. In particular, the ageing time bomb will overwhelm fiscal policy.

Thanks again, everyone,


dearieme said...

Oh, another point. I've seen complaints about the coalition's ring-fencing of NHS expenditure. Whatever their motives, it's probably not a bad idea; ageing is going to drive demand ever upwards, so cuts now would have to be quickly reversed. Better to leave totals alone and see if a few useful reforms can be tweaked; or perhaps leave it alone for a while -too many reforms spoil the broth. When the NHS faces collapse is the earliest time that sweeping reform will be politically realistic. Whatever the shortcomings of the politicians, we have to remember that they are constrained by the stupidity, ignorance and selfishness of the electorate.

Anonymous said...

Why is an ageing population a problem?

In 1908 Old Age Pensions Act introduced from age 70 on a means-tested basis.
Back then education lasted until about 12 years old.
Life expectency was 50 years old!

So 'if' people made it to pension age, they would have been putting in for 58 years and likely not long much longer at all.


Today, retirement is approx 60 years on average (I know some work longer but many less also).
Education lasts until on average about 19 years old.
Life expectency is 79.
So people are expected to live 19 years on average on a pension, right?

So people are working 41 years to get 19 years of pension..
Clearly we can see the problem, we are heading in the wrong direction, working far less years by proportion to the length of pension than when it was originally introduced.

But anyway, assume for a moment that everyone starts work at 19, and retires 19 years earlier than their life expectency, as now.
Live to 79, work 41 get 19 years pension.
Now if life expectency increases to say, 90, retiree at 71.
work 52 years for 19 years pension.
In this example we get a higher proportion of working years vs years on pension..
So living longer should make it more affordable not less? no?

The problem is that people tend to assume those who live longer, live those years in poor health and although unfortunately that is sometimes true, not always.

I met an old friend of my dad a few months ago, he was 67, I would have guessed early 50's. He had retired 17 years ago from the Police!
He was still a fit strong tough looking fellow.