17 May 2018
Silver Striver Or Skiver?
The danger and futility of taxing the elderly.
By Frank O’Nomics
The UK faces a huge economic problem as a result of its ageing population. Recent projections of the increased money needed for education, health and social security spending by 2040 amount to an additional £63bn – the equivalent of putting 15p on basic rate tax, if that was the way in which it was to be funded. The Intergovernmental Commission Report recently released argues that the social contract between the young and old is “under threat”, with a declining younger population forced to pay for the care of an increasing older population. The solution being proposed on the face of it seems logical – tax the elderly to relieve the burden on the young – with one of the key recommendations, seemingly favoured by the Health Secretary Jeremy Hunt, a £2.3bn levy (to help fund the shortfall in NHS funding) on those who continue to work beyond the state retirement age. However, there is a problem with policies which do not consider why people continue to work and do not examine the potentially negative consequences.
On the face of it there is a strong case for extending national insurance contributions to include those working beyond their 66th birthday (from next year) for men and women. Effectively those who continue to work get a nice 12% pay rise (up to 12%) once they hit retirement age due to their ceasing to pay NI. The Chairman of the Intergovernmental Commission has questioned why a man aged 57 should be paid less than one aged 67 for doing the same job, particularly when the older man is more likely to be free of household debt. There are currently 1.3 million people working past their state retirement age and getting them to pay national insurance contributions would supposedly generate in excess of £2bn of year, which would go a long way towards helping to solve problems with the social security system.
The problem with this seemingly perfect solution is that, like many economic arguments, it only works if you ignore all other variables, and there are some strong reasons why it won’t work in practice. First, the assumption that a 57 year old and 67 year old will be doing the same job for different pay is an unlikely situation. The 67 year old is much more likely to be working part-time and might not even hit the national insurance trigger anyway. Where they are being paid the same it is likely that the older man is being encouraged to carry on working due to his skills being in great demand. This leads to the second significant problem – the £1.3 million “silver strivers” will be a shrinking cohort of the workforce if you increase their taxes. With a reduced incentive to carry on working, many will prefer the garden or the golf course and not only will the increased NI take be much less than £2bn, it could be largely offset by the reduced income tax receipts due to retiring workers. And it is not just tax receipts that will be lost, given that people with great experience are likely to be highly productive – taking them out of the economy could have a multiplied impact on UK GDP.
Quite apart from being based on doubtful assumptions the policy ignores some very real potential human consequences. Yes, there are those who continue working because they enjoy it or can’t face the drop in income when they stop – even though they could comfortably afford to retire. However, a significant number of those still working do so because they have to. How can it be equitable to tax people who keep on working because they are poor, when you are not applying any further tax on those who have retired because they are wealthy? This creates a situation where the hard working poor are subsidising the care of the idle rich.
One of the major justifications for bringing in age discrimination legislation was that it allowed many to avoid being driven into an impoverished retirement. A report by the Joseph Rowntree Foundation showed that the number of pensioners living in poverty has risen by almost 300,000 in just the last 5 years, to 1.9 million people. Many of these would welcome the opportunity to carry on working if they were fit and healthy enough to do so, but taxing them more would just increase the amount of time that they needed to keep working.
The final implication to be considered is the impact on the electorate. The Tory party suffered in the last election due to a suggestion that those with over £100,000 of assets should pay for their care provision. Imposing national insurance contributions on the elderly could have a similar impact and prompt those in fear of losing their seats to argue against it. Returning to the arguments for taxing the wealth of the richer retired as an alternative, the same issues of electoral revolt apply. Arguments for a mansion tax, or a tax on a broader set of assets, may not go away, but with an ageing population it is likely to be a passport to electoral defeat. There would also be consequences resulting from the splitting up of estates before death that would reduce the tax take and create a more inefficient economy.
Once again you have a commentator rubbishing proposed solutions to a significant problem. The problems created by our ageing population will not go away, and we clearly need to find ways of funding the likely shortfall in the provision of social services. However, the way to do this is not to discourage those beyond retirement age from continuing to work. It is the income tax generated by elderly workers that will fund the NHS, not national insurance. We need to positively encourage pensioners to strive not skive.