THIS YEAR is the 60th anniversary of the end of the Second World War. It is also, therefore, the 60th anniversary of the great demobilisation; when the boys came home, the girls, not surprisingly, started to have babies. That was the origin of the baby boom, which lasted into the 1960s. It came to an end: partly because marriages postponed by the war completed their cycle of fertility; partly because of the invention of the Pill; and partly because the abortion boom succeeded the baby boom.
When the boys came home, they tended to elect social democratic governments: committed to building welfare states; particularly in Europe. The rejection of Winston Churchill in 1945 was the classic example; but other European countries went farther than Britain in developing expensive welfare systems. Even in the United States, the Democrats remained the dominant party until 1968, apart from the two terms when President Eisenhower, a relatively non-political general, was in the White House.
No one then foresaw the decline in fertility rates, particularly in Europe. Britain and France have maintained a higher fertility rate: 1.7 children per woman in the period 1995-2000; that is quite close to the replacement level. Yet in the same period the German fertility rate was 1.3, the Italian 1.2, the Russian 1.2, and the Spanish only 1.1; these are well below replacement levels.
The current estimate is that by 2020 the median age will have risen to 48 in Italy, and 46 in Germany and Spain. By 2050, 40 per cent in these countries will be 65 or over, as against less than 25 per cent in the year 2000. Europe is moving into a prolonged and now inevitable demographic crisis, with unfunded pensions for an ageing population. People are living much longer — beyond all actuarial expectations.
Britain is in a relatively favourable situation, the most favourable of the major European countries. When one looks at their pension liabilities, and the lack of young workers or of revenue to meet them, one could well conclude that Germany, Italy and Spain may be fiscally bankrupt by 2020: with too few taxpayers to support an expanding retired population. My view is that the euro itself may not survive, since some eurozone countries will have a much bigger problem than others. This could become a matter of sauve qui peut.
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Unfortunately, Gordon Brown has made a series of bad decisions since 1997, which have done much to erode the British advantage. Three particularly bad decisions stand out, which are all his responsibility; though of course the Cabinet share responsibility. Tony Blair has utterly failed to control his Chancellor.
The first bad decision, perhaps the worst, was made in Mr Brown’s first Budget. He decided to remove the tax benefit which pension funds and charities gained from advanced corporation tax. In the past eight years that has cost pension funds about £50 billion and has reduced the value of investments by about £100 billion, perhaps more.
That is the prime reason for the crisis in the private sector which has led to many funds and life assurance companies being closed. It was a black day’s work. That decision did great damage to private sector pensions, and to those parts of the public sector which are funded from real investments.
The Chancellor’s second bad decision was to introduce widespread means-testing, which the trade unions always used to fight. Large numbers of pensioners do not even claim the means-tested benefits to which they are entitled; they feel that they pauperise themselves in their own eyes. Means-testing is the wrong way to provide an adequate pension in retirement.
The other bad decision was the loss of control of public sector pensions, including the pensions of NHS staff, of the Civil Service, and of ministers and MPs. Last week there was a report of the cost. It came as a staggering blow to the fiscal outlook of the United Kingdom. Three million unfunded public sector employees enjoy 29 per cent of accrued pension rights.
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The actuarial consultants, Watson Wyatt, using public sector accounting rules, estimated that unfunded public sector pension liabilities will reach £690 billion in March. That is an unfunded liability of £11,500 per head of the population of the UK, and is much larger than the £410 billion of the rest of the national debt.
These are extraordinarily large sums. At the end of 1999, which was the top of the stock market boom, the whole capitalisation of the London stock market was only about £1,500 billion at our current exchange rate. That is little more than twice the current unfunded liability for this group of public sector pensions.
These liabilities do not include those of the retirement pension, or of private sector pension plans, or of individual life assurance pensions. They are the current value — which will inevitably rise — of the future pensions of only three million employees of the State. They have no matching assets, and will have to be met solely out of taxation.
Some other countries have started to tackle their pension problems. Canada and Australia have moved to fund their liabilities, and George Bush included a funding proposal in his inaugural address. However, Mr Brown has not proposed any adequate reforms. He is even considering a £3 billion sweetener to housewives on their pension: which will again fall on the taxpayer. The time for pension sweeteners has passed.
Europe’s pension problems, however, seem insoluble. It would obviously be madness to join the euro while the European pension crisis is still unresolved. The Government has no proposal to fund Britain’s unfunded pensions, or even to withdraw the Chancellor’s stealth tax on pension fund revenue. These issues will inevitably come to a head in the next Parliament, when they could destroy whichever government is elected. They should be central to the general election debate.
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Later retirement, lower pensions and higher taxation may now be inevitable; they will be Mr Brown’s legacy.
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