ong>PENSIONS FROM BIRTH
Debate rages as to how to ensure a solidly based long-term future for pensions. Some of the problems, such as the falling proportion of the working age population, are imaginary or exaggerated, while financing difficulties have been magnified by the discovery that equity prices can fall sharply over short periods. But a solution was hinted at in Samuel Brittan's review of Gordon Brown's "baby bond" plan in August's Prospect.
Why not take a much bolder initiative and bring in pensions from birth? This could provide every man and woman born in 2004 or after with a pension at 65 of ?5,000, tax-free and index linked against inflation. Today ?5,000 is about 20 per cent of average household income after payment of direct taxes. This would shrink to no more than a tenth of future incomes if GDP doubles in real terms over the next 65 years. But apart from the obvious fact that ?5,000 would be worth relatively more to people lower down the income scale, it would be paid at the same rate to everyone-couples would therefore receive ?10,000.
A simplified analysis of the way in which the scheme might work is set out in the next column. The most surprising thing is that, at full maturity, it would absorb no more than 2 1/4 per cent of future GDP based on modest growth projections. Indeed, it would be possible to reintroduce a link between pension payments and increased national wealth. If the ?5,000 pension were to be linked to annual increases at half the rate of GDP growth, then when the first pensions started to be paid in 2069, they would be at a rate of just over ?7,000. On the assumptions made here, new pensioners would number 700,000 in 2069 and increase by the same figure each year until 2086, when they would reach just under 12m. Even with built in escalation, pension payments would still absorb under 3 per cent of GDP.
There is only one difficulty in principle: can governments be relied on to keep their hands off the steadily accumulating fund which will peak at ?1,350bn-over half the national income. Perhaps the fact that the money would be personal property could help to avoid the precedent of the Road Fund notoriously raided by Winston Churchill.
The Mechanics
Every child would receive ?10,000 on birth. Between their fifth and 65th birthday annual interest would be credited, at an inflation-proofed 3 per cent. At the age of 65 there would be ?60,000 in their account. This would provide an annuity of ?5,000-which itself would be index-linked, and paid tax free.
Making some simplified assumptions the finances would look like this:
For the individual. ?10,000 paid into a personal account on birth. On the fifth birthday: interest credited of ?300. Each successive birthday up to and including the 65th-a further ?300, indexed for inflation, compound, and tax-free providing eg ?542 in 2029; ?978 in 2049; and a final ?1,767 in 2069. The total fund in 2069 would amount to ?60,500.
Total costs. Assuming: 700,000 births each year; no deaths before the age of 65; pensioners drawing benefits for 17 years on average. Initial costs in each year = ?7bn
Plus interest costs
(Year 1) 2009 ?0.210 bn
(Year 20) 2029 ?13.020
(Year 60) 2069 ?35.510
Pension Pay Out (at ?5,000 per annum, index linked)
2069 ?3.5bn
2086 ?59.5bn (maximum)
