Taxing capital to pay for pensions

Robin Blackburn, author of Banking on Death, or, Investing in Life: The history and future of pensions, spoke at the AWL London forum on 17 February 2005. This is a transcript of his speech and the discussion.

The pension issue is the one which has proved time and again that it can get really large numbers of working people fighting for their rights and for a better world.

In the 1990s three European governments were overthrown as a result of strikes, demonstrations, and agitation relating to pensions. The most dramatic example was the November-December 1995 strike of French workers against the so-called pension reform of the Alain Juppé government. He was forced to abandon his plans, and he was defeated at the subsequent general election.

Around the same time, the first Berlusconi government was defeated in a similar way, and Helmut Kohl too. In this country, I think pension issues were an element in the defeat of the Major government. The pension mis-selling scandal, which swindled one and a half million people out of an important part of their pension rights, contributed to the deep discredit of the Major government. Also, more long term, the fact that Thatcher had begun the immiseration of British public pensions by removing the earnings link, was a subterranean factor.

Last year we had demonstrations of more than a million people in Italy, in France, and in Austria over pension rights. In recent weeks we have had the largest opposition to the Putin government in Russia over the same issue.

The existence of public pension schemes, and of some collective occupational schemes, especially in the public sector, was the fruit of industrial and political struggle. Here in Britain it is almost exactly a century ago that the trade unions set up a body called the Trade Union Campaign to Endow Old Age. Its agitation was one of the things that led Lloyd George to the first state pension proposals just four years later, in 1908.

The struggle for pension rights is in some ways an extension of the wage struggle. It is a struggle for deferred wages. But it is also about relations between generations - how we view the sacrifices of the older generations - and it is about the struggle for free time, a struggle to live within capitalism and in the end to surpass it.

The struggle for free time takes many forms - the struggle for holiday entitlements, for educational breaks, but also for a decent economic support for life in old age.

The pension issue taps into something deep here. The ideal of expanded free time - which also includes the right to uncoerced free work - is one factor in why the pension issue mobilises so many people.

It is very important that we should be defending the line of no raising of the state retirement age. Part of what the Blair government is doing, and part of the trend of the capitalist society we live in, is to get back to the old days of "work until you drop", and to add onto it the new imperative of financialised capitalism, which is to make everything you do into a commodity, to commodify your whole existence.

If we can defend people's right to decent pensions, it does not just mean defending their right to be passive. In fact we know that if people have a decently funded old age, they will be more active, helping their family, helping the community, or maybe getting another job, maybe a part-time one, without any loss of their pension entitlements.

Pension rights were won above all in the period after World War 2. Good occupational schemes were set up, based on a guaranteed link to final salary or an average of the best working years.

Now we are living through a crisis of both public and private pensions, alongside a growing trend to entice the whole population into various forms of debt. Debt is currently at about 120% of disposable income. That is another expression of the imperative of commercialisation and commodification.

The Blair government is currently studying introducing compulsory private pensions. You would have to pay taxes to a bank or an insurance house. That is what is being proposed. There is an Atlantic axis on this. Bush is planning to privatise a whole chunk of Social Security in the United States.

The most obvious aspect of crisis in the public pension system in Britain today is that the pension is simply not enough. It is an insult. It is down to 15% of average earnings. It has declined from being over 20% around 1980, and it is due to go down to about 10%. It is indexed to prices, not earnings, and as earnings have gradually crept ahead of prices that leaves pensioners behind.

The average pension of single women is only £95 a week. It's a curious feature of discussion of the public pension system is that it is always done in terms of pounds per week. The state pension is described as being £75 per week, or £110 for a couple. Normally it is children's pocket money we think of in terms of pounds per week, and we describe adult incomes in round annual sums. What pensioners are being asked to live on is considerably less than £5000 a year, and many are on less than £4000.

Of course, the state pensioner can supposedly get a bit more if they apply for an incredibly complicated means-tested supplement, the Pension Credit. But we know that at least half a million older people, and maybe more, for one reason or another, do not in fact claim the credit to which they are entitled.

The answer is to go back to what the TUC was demanding a hundred years ago. There should be a universal right to a decent state pension. And it should be indexed to earnings and not to prices. That is what Barbara Castle fought for at the Labour Party conference in 2000. The conference voted to restore the link to earnings. The Labour leadership had previously been offering 75p a week increase in pensions, but they upped it to £5 a week.

Part of Brown and Blair coming forward with that concession was also to do with that very ambiguous and remarkable event, the fuel strike, which set the scene. The unions, particularly the Transport and General Workers' Union, were very important in defusing that crisis for the government.

Once again, as we enter a very tense period and an election year, I think we should be making a major push to improve the state pension.

There is an amazing alliance against New Labour on this. We have, formally committed to an improvement in the basic state pension, the following institutions. The TUC. The House of Lords. The Conservative Party. Even the CBI. It is true that in the case of the CBI, they are wrapping it up with perhaps raising the state retirement age.

Another form of crisis in state pensions is as yet remote for us in England, and that is the problem of funding a decent state pension. If you had a decent state pension, with a "secondary" layer constructed on an ample basis, then there would be a problem of funding it.

So far as the state pension itself is concerned, a perfectly adequate mechanism is the National Insurance contribution system, in the jargon, a payroll tax. For egalitarians there is a problem here. It is regressive. Rich people pay a smaller proportion of their income than the low-paid. It would be better to have a progressive taxing system. But in fact the pay-out system of most state pensions in most parts of the world, even including the USA, converts the overall logic of the system to make it slightly progressive.

In continental Europe, the big battles I was referring to earlier arose in part because the funding mechanism of a payroll tax has shown limitations. It's not very good to have the whole pension system based on a payroll tax. If you do that, the tax becomes high, and it creates a deflationary climate. Europe still has a strong economy, but unemployment has been very high now for two decades, and that is partly because of the whole baby-boomer generation being in work and so much money being taken out of circulation through the payroll taxes. You have had too few pensioners and too many workers, just the opposite of what you may have been told.

I think we should look at new funding mechanisms which do not attach to labour incomes, a new pension regime which taxes capital.

The answer was already seen by someone who was, in my opinion, one of the most far-sighted strategists of the European workers' movement of the last fifty years - Rudolf Meidner, the chief economist of LO, the main Swedish trade union organisation.

Meidner understood that the Swedish welfare state was a sort of compromise between labour and capital. In the 1970s he said, comrades, we have come to the point where either capital moves against us, or we move against capital. At the 1975 national convention of LO, he set out the need for what he called wage-earner funds.

He argued for requiring every corporation employing more than 50 people to contribute 20% of its profits each year in the form of new shares, to be held by the wage-earner funds as a social reserve.

He saw the problems looming up, and he said that either they would tip the balance in favour of labour, or in favour of capital. The wage-earner funds were the way to tip things in favour of labour and its social allies.

Meidner was a social democrat, but from a Marxist tradition. He was German-Jewish, not Swedish, in origin, and was a disciple of Rudolf Hilferding.

From the 1950s onwards he designed the Swedish welfare system to ensure decent benefits without unemployment. Right down to this day, even though aspects of Meidner's proposals have not been introduced, and Sweden has abandoned many of Meidner's ideas, official unemployment is under 5% in Sweden while it is 10% in Germany and France.

The wage-earner funds proposal was implemented by Olof Palme in a quite diluted way in 1982. It worked for about ten years, and the funds acquired a stake of about 7% of the Swedish stock market. Workers did not have proper control of the wage-earner funds, which had been the original idea, but even so they were seen as a big threat by the twenty families which dominate Sweden's economy.

The conservatives repealed the wage-earner funds law when they came into office in 1992, and the Social Democrats have been too craven since then to reintroduce it. The money from the funds was used to set up six research institutes, and as a result Sweden has one of the strongest knowledge-based economies in Europe.

We ought to explore Meidner's idea as a way of properly funding a new layer of state pensions. But first I want to say something about occupational and private schemes.

The big distinction among private pensions is between "defined benefit" and "defined contribution". In the "defined contribution" method you put in your money - usually the employer puts in not very much - and you get out of it whatever pension the market will grant when you come to retire. With "defined benefit" there is a definite pension promise, usually related to final salary or the best working years or some such formula.

In recent years, increasingly, large companies have phased out the "defined benefit" schemes, where they bear the market risk, and replaced them with "defined contribution" schemes where the worker bears the market risk. The employers used to contribute 12 or 15% of salary to the "defined benefit" schemes, and they are now unlikely to contribute more than 3 or 4% to the "defined benefit" schemes. In some cases they contribute nothing.

It is difficult to get into a "defined benefit" scheme these days, so you are forced into a "defined contribution" scheme. Charges on those schemes are very heavy. They have to be customised for individuals. That is expensive. They are competitively supplied, and that means a heavy marketing spend.

Charges on the "stakeholder" schemes are now 1.5%. An independent financial adviser will cost you, maybe, another 0.5% in fees. Pay 2% of the pension pot each year in charges, and - unless you're in a period when the rate of return in the stock market is in the double digits, and the recent report of the Pension Commission thinks it would be crazy to think of a rate of return of more than 6% in the long term - it takes a heavy toll. Over the lifetime of a scheme, say 30 years, charges will reduce the value of your pension pot by 30% or more.

Occupational pension schemes are much better than the private purchase schemes. The expenses are under control. Sometimes workers have won the right to some say over the conduct of the pension fund. In the USA the unions have made more progress on that than there. In the Californian Public Employee Retirement System, CALPERS, the largest pension fund in the world, the unions organised to get proper representation, and have been able to use it as a vehicle for insisting that the companies that the fund invests in recognise union rights, set ceilings on remuneration of CEOs, and so on.

There is a faulty structure in many private sector schemes which allows the employers to take exorbitant contribution holidays. When the stock market is going up, the employer can take a contribution holiday because they can point to the shares going up and say that the scheme is fully funded. According to the Inland Revenue, £28 billion of contribution holidays were taken by leading British companies between 1988 and 2002. Their pension funds are currently underfunded to the tune of about £70 billion. 40% of that gap - or more if you take into account that the contribution money would have grown if it had been put into the funds - is down to the contribution holidays.

When the trade cycle winds down, and the stock market goes down, the companies are supposedly obliged to put contributions into the funds. These funds tend to be worth as much as the company itself. In quite a lot of cases, like GKN or Rolls Royce, the pension fund deficit alone is equivalent to more than half the value of the company. It's crazy economics.

It is difficult for workers who have membership in these schemes. They have schemes, sometimes negotiated with the trade unions, which have negative outcomes for the viability of the company and their jobs.

In Europe high payroll taxes have been part of the story of high unemployment. There is a similar story with the large private sector "defined benefit" funds. In the downturn they require companies to subtract from cash flow to fix the pension fund, they stop those companies investing at that point and oblige them to cut back on employment.

So the airline and steel unions in the USA, for example, have been blackmailed into downgrading their pension rights in order to save their jobs. The labour movement should not put itself into that sort of situation, where it has to make that sort of trade-off, and the only way out of it is to find a new way to get employers to contribute.

What the big banks are cooking up now, with new waves of mergers and acquisitions, is "liability-shedding". They take a company that has some assets and come up with a scheme for separating the pension fund from the company. That is what has happened with Allders, the retail chain. What they do is take a company, sell off its valuable assets, and then leave a shell company which has no assets but has the obligation to fix the pension fund. That is how tens of thousands of workers have found that the company's promise to pay their pensions was empty.

Employers are not contributing to pensions in the way they used to in three crucial ways. Contribution holidays. Not paying tax, and thus constraining public schemes. And making lower contributions to company pension schemes. The heart of the problem is that capital, or the large corporations, are making a steadily declining contribution to pensions.

A Meidner approach is the best way. I have calculated that over 25 years, with just a 10% levy, the Meidner funds could accumulate a £500 billion fund. I have described various ways in which that could be boosted to a £1000 billion fund, capable of generating £14 billion a year in income for pension provision.

Really, what this would be doing is restoring the employers' contribution. It would also establish new economic agencies with a power of active engagement, able to use the shareholding power to monitor what companies were doing.

It is not a formula for socialism, but it could have a certain transitional logic to it. It would make a strong contribution to a more egalitarian pattern of society. It also puts a spotlight on the wasteful practices of the financial services industry.

How many pensioners are there in Britain?

10 million or 11 million.

What would the money in the Meidner funds be used for? To fund the state pension?

It should be used to fund a second layer of pensions for everyone, something like the State Earnings Related Pension Scheme put in place by Barbara Castle in 1975 and degraded by Margaret Thatcher in 1987, or the State Second Pension today. There is a case for just using it to fund a bigger state pension. But there is a culture in Britain of attachment to things like the State Earnings Related Pension Scheme which are redistributive but do allow you to get a higher pension by paying in more if you want. Differentials are a difficult question for trade unions, but generally we do not try to abolish all differentials. It would be unrealistic or even divisive. A progressive trade union movement tries to diminish differentials by, for example, gaining a slightly higher rate of wage increase for lower-paid workers.

About issues like abolishing tuition fees or restoring the NHS, we just say "tax the rich". Why not just say the same thing about pensions?

This is a "tax the rich" solution, but it's a different "tax the rich" solution from those like raising income tax. It's another way of having a go at capital, and it's a bad idea to put all your effort into taxing income and not put any effort into taxing capital, redistributing wealth instead of income.

Isn't there an ideological problem about tying pension provision to share ownership?

There is a risk, though what we are talking about here is not individual ownership. You could say that the scheme would give the whole working class an interest in profitable abuses, or in dangerous ecological practices - for example if the Meidner funds owned shares in oil companies drilling in the Arctic. So there would be a sort of class struggle among the working people - which is often the most difficult sort of class struggle there is - a struggle against bourgeois ideology. The funds would have to decide whether the notional tiny extra bit of profit from, for example, what Shell does in Nigeria, is worth it. I think in fact there would be less inclination to side with employers' abuses than employees sometimes have now.

There's a problem not only with the total volume of pension payments, but with the inequality of pensions. Some pensioners are well off and some are very poor. And inequality of pensions hits harder than inequality at working age, because it is permanent and rigidly fixed until you die.

Yes. The financial services industry is hugely subsidised by the Exchequer through tax breaks. The gross cost of that to the Exchequer each year is £19 billion, a subsidy mostly going to the wealthier pensioners. One expert has calculated that the richest 10% of pension savers get 51% of all the tax relief.

You could scrap all the tax relief and replace it by a system of "matching contributions" in the Meidner funds up to a certain threshhold.

You're not proposing the capital levy just as a slick piece of financial management, but because of its transitional logic. If you set the deduction from profits large enough, then after a certain period the funds will control most of the big corporations. You will have expropriated the capitalists. But it won't happen like that. At a certain point the capitalists would resist. How do you see the logic developing? And isn't there maybe a problem here of being "too clever"? You introduce the demand because you see it has a transitional logic, and you hope that the capitalists don't see it has a transitional logic. It's a transitional demand by stealth.

I think transitional demands often have had a slightly stealthy character. But the idea is quite open here. It is what R H Tawney called skinning the capitalist tiger claw by claw. He said you couldn't do it. All I'd say is that many ways to skin the capitalist tiger have been proposed, and I think the Meidner one is an interesting one, worth trying.

In Sweden the twenty families saw what was coming and they did destroy it. Our capitalist class is immensely strong and confident, and unfortunately the least worry it has at present is about socialism.

I've found it quite weird advocating these ideas about pensions in all sorts of circles. I've had an article in Reuters magazine and an interview in the Financial Times. The Lord Lieutenant of Essex invited me to speak to the Lieutenants of Essex, who are the least radical audience you could imagine. They thought it was a bit mad, but they listened politely.

Meidner proposed his scheme as a transition, though not quite to socialism - because you still have commodity production, you still have wage labour, you still have the property form of state ownership. I don't think it would all unroll smoothly. There are already big social struggles about pensions. The question is, how can we take them forward.

The question is not what will the capitalists spot, because they are sharp enough where their own interests are concerned to spot things. What is much more important is whether we can devise schemes which working people can understand as genuinely realistic and take up. They can have a transitional logic, because they are linking into people's concerns.

And they not just about the present. They are about the future. As soon as you start talking about the future, you are encroaching on capital. Capital is a way of staking a claim for its owners to a future stream of surplus value, and these pension proposals are disputing that claim.

What about democratic control over the existing pension funds? You estimate the Meidner funds as accumulating £500 billion over 25 years, but the existing pension funds have about £950 billion.

Very few of these funds have any element of democratic control. And there is a big element of inequality within them. The public pension regime has a somewhat equalising effect. Most of the tax relief goes to the rich, but a limit is set. Gordon Brown said that you could not have a pension pot bigger than £1.5 million. He first proposed £1.4 million, and a lot of City types said that was ridiculous, so he raised it to £1.5 million; but Gordon Brown has already shown us that we could reduce that figure from £1.5 million to a more reasonable figure.