Who Should Pay for Pensions?

Craig Dalzell – February 10th, 2022

The last couple of weeks have re-ignited the debate around one of the most contentious topics in the whole independence question – what will Scottish independence mean for the state pension and whether it will fall to the Scottish or remaining UK Government (rUK) to pay state pensions to people who have already paid National Insurance Contributions in the years leading up to independence.

I won’t rehash the whole debate in this column but I would direct folk first to the contribution from the Fraser of Allander Institute who point out that the issue of “who pays” will hinge on the agreement of a deal on pensions between the two governments and the outcome of that deal will likely depend on which party has the most to lose by a failure to agree. I would then humbly suggest my own contribution which details why I believe that the rUK has potentially a great deal to lose by refusing to negotiate or failing to agree a deal on pensions and does not have nearly the kind of leverage that some might suggest when they try to imply that pensioners could be impoverished should Scotland vote for independence.

Instead, I’d like to dive into a detail of the debate that is often missed or misrepresented by a lot of people on both sides of this debate and, in doing so, it narrows our thinking about how the state pension works, what it is for and what it even means if someone asks if a pension policy is “affordable” or not.

When discussing pension “affordability” the traditional method is to discuss the “Old Age Dependency Ratio” or OADR – that is, the number of pensioners in a society compared to the number of workers. In 1990 there were 286 pensioners for every 1,000 workers in Scotland. At present – due to a combination of extended lifespans and increasing pension age (which acts to convert “pensioners” back into “workers”) there are approximately 310 pensioners per 1,000 workers. This number is expected to increase to 400 pensioners per 1,000 workers by 2040. According to this traditional metric, this is a “demographic timebomb” and a “crisis” for pension affordability as there will be fewer workers in society paying their taxes to “look after” an increasing number of pensioners.

In the recent book All of Our Futures by myself and Bill Johnston, we argue that this metric is fundamentally flawed and leads to divisive and outright ageist politics. One issue in the constitutional debate around pensions comes up whenever someone mentions a “pension pot” that could be divided between Scotland and the rUK. This pot does not exist in any practical sense and the state pension is ultimately paid out of the same general Consolidated Fund as any other major policy. What this means is that the state pension is not, in practice, “paid for” out of the income tax and National Insurance payments of workers – neither in the sense of us “paying forward” for our own future pension or workers today “paying for” the pensioners of today (though there remains a social contract in which you will receive a state pension based on the number of years you’ve paid National Insurance). Limiting our argument on pension affordability to the OADR ends up falling into a frame of mind that certainly accords with neoliberal economics in which workers are defined “productive consumers” and pensioners as “unproductive consumers” – with both groups only “useful” insofar as they can buy goods and services and the former only additionally useful insofar as they can produce those goods and services. Questions of wellbeing, “social security” or even fair wages and the ability to live decently beyond the basics of existence are secondary. “You” don’t matter, only your role in “growing GDP” matters.

By limiting our thinking on pension affordability to “how many workers there are” we omit discussions about the full gamut of tax and spending powers. We lose the ability to look at other potential taxes such as those on wealth, land, resources, pollution or any other area of governance. The sheer number of workers is also not very informative when the wage stagnation of the past several decades has meant that the wealth created by workers has gone not into creating income (and thus creating income taxes) but has instead created Capital gains and the accumulation of wealth by a very few. Whether we consider conventional “tax and spend” economics or if we consider the views of Modern Monetary Theories those wealth sinks seem to be a better target for taxes aimed at improving social security. This issue will become even more important as automation and other disruptive technologies increasingly pull the means of production and service delivery away from workers and push them into the hands of those who have already accumulated enough capital to be able to buy the robots on the production line, or the ones writing the algorithms that increasingly dominate our lives, or the ones running the taxis and public transit systems that used to have human drivers, or doing the HR jobs that middle-managers used to do…

We might also consider those who extract Scottish resources for their own profit – both BP and Shell have posted record profits just weeks after winning a lion’s share of the recent Scotwind auction. It is likely a large share of the profits from this kind of resource extraction will not go to the workers who made it happen – the $4.1 billion profit announced by BP this week for their fourth quarter in 2021 is equivalent to over 40% of their entire workforce payroll for the whole of 2020. If these companies find themselves unable to better invest their profits in their workers, then the case grows for increased profit taxation so that Governments can better invest in the social programmes that secure the wellbeing of those workers outwith their employment.

The argument over how pensions will be handled in the transition to independence is obviously not ready to be settled yet. However it is, I would hope that both sides of the constitutional divide could at least agree a “non-aggression pact” and mutually promise that no matter how the deals shake out and who ends up paying for which pensioners, they shall ensure that no individual will be left worse off in their state pension by the fact of independence. Certainly, anyone threatening to hold vulnerable pensioners hostage to the fortune of democracy should be castigated in the strongest possible terms.

Post-independence, Scotland will gain choices over pensions that it does not currently enjoy. We will have new powers over taxation, regulation and even the way that we measure how we’re performing as a nation. These can lead to new ways of thinking about policies and perhaps considering solutions that would be impossible to reach otherwise. If we start now, we could craft a vision for Scotland that comes with an actual plan to secure the wellbeing of all of our futures, not just the threats and bluff we’re seeing too much of today.

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You can read more about pensions in an independent Scotland and some of the policies that we could enact to secure them in Craig and Bill’s book All of Our Futures, available exclusively in the Common Weal shop. The book also includes discussions on housing, health, the workplace and the economy as well as challenges against the baleful influence of neoliberalism and ageism on policy and public perceptions of ageing.