Small, Competitive, and Sovereign?
Impostor Syndrome or Impostor?
Why Britain needs a national day
I am now a Permanent Resident (PR) in Singapore. My stay in the country is no longer tied to an employment visa. That newly granted status means making obligatory contributions to my Central Provident Fund (CPF), Singapore’s social insurance plan, which chiefly covers one’s retirement provisions.
Those contributions will gradually increase until they meet the standard 17% of the first S$102,000 (c.£60,000) of gross salary. Employers top that up with an additional 20%. As a business owner, I feel somewhat conflicted about that generosity. But being forced to save more is no bad thing. Particularly as CPF is an individualised savings account. I can see exactly how much is there and predict what kind of retirement settlement I’m likely to reach.
Britain’s National Insurance
I think about this as the Conservatives pledge to halve National Insurance (NI) contributions on 21-24s, with employers paying only 7.5% on earnings up to £50,270. The party estimates the policy would create 33,600 new jobs. And that the subsequent £3.25bn in lost NI receipts will be partly offset by additional income tax and reduced universal credit payments.
It’s a constructive idea to reduce growing youth unemployment. Lower wages and less hiring are the obvious consequences of increasing the financial burden of employing people. But, with the party committed to the Triple Lock, it raises questions about the sustainability of Britain’s National Insurance Fund (NIF). Unfavourable demographics and stagnant growth make the pledge to match the higher of inflation, wage growth or 2.5% in the state pension impractical longer-term.
So the challenge is threefold. One, reduce employment costs on businesses. Two, wean people off universal pension guarantees. Three, offer a compelling alternative to workers. Fulfilling all three objectives is the only route to fiscal responsibility and growth. Prime Minister Andy Burnham confronts two and three with his plans for a new National Care Service that swaps the possibility of pensions outstripping earnings for promised old-age care to all who need it.
State guarantees versus personal responsibility
But it’s an essentially statist solution that swaps a financial commitment for something more direct. Any pressure alleviated on the NIF is likely to be borne elsewhere in providing such care. However, it leaves the door ajar for the Conservatives to offer an alternative. One of self-reliance.
There is a strong foundation to build upon. Private pensions are one of Britain’s stand-out contemporary achievements. The coalition government implemented the automatic enrolment framework, developed by Labour, in 2012. Since then, the percentage of employees contributing to a workplace pension has grown to 82%. It has democratised pension access and more workers are building personal pools of capital.
It’s still a long way from the individual responsibility enforced by Singapore’s CPF. That sui generis system guarantees returns of around 4% because the government subsequently manages that pool of capital through its sovereign wealth fund, GIC. Not only are retirements therefore self-funded but the government actively profits from those contributions. Yet it offers lessons on how Britain might move towards an ethos of greater self-provision.
CPF and high-earners
Singapore can levy such high CPF rates because low taxes make its burden easier to bear. A Singaporean on Britain’s median wage of £39,000 will pay about eight times less in income tax, while taking home a similar net pay. But the Singaporean will also accrue about £14,000 in personal CPF savings, while the Brit will only get £2,000 in a personal pension pot if meeting the minimum automatic contribution levels.
A major part of that discrepancy comes from the greater employer contributions. I feel that burden running my own company where this 20% needs to be factored into pay increases. But CPF is capped. I don’t pay anything after the S$102,000 threshold, whereas British employers keep paying 15% indefinitely. So while there’s a certain logic to Conservative proposals in decreasing NI for junior workers, a cohort you’re less likely to see immediate value from, Singapore’s system means that highly-paid experienced performers don’t handicap my ability to hire juniors.
It’s here that there could be a win-win-win for businesses, government finances, and workers. What if Britain reduced the NI burden on high-earners while also phasing them out of state pension provisions? This could take the form of an exchange, whereby employers pay less NI and the employee receives additional private pension contributions in exchange for a reduced state pension.
What a pilot scheme might look like
Such a pilot scheme could initially be restricted to workers over 40 with earnings above £100,000 and substantial pension savings. Rather than reducing the 15% employer NI rate across the entire salary, it could first target the portion of earnings above £100,000. An employee could choose to reduce her employer’s NI rate from 15% to 10%. The employer retains half that benefit while the other half is allocated to the employee’s pension. In exchange, the employee surrenders a calculated portion of her projected state pension.
Of course, it would be criticised for pressuring employees to sacrifice financial security for employability. But it would attach a tangible carrot. Increasing transparency and education around market-returns would show applicable employees can be better off long-term relying on a personal pension rather than a guaranteed income from the state.
Conservatives can use Burnham’s opening to present this vision. One in which Britain’s pension system doesn’t have to be a choice between universal entitlement and means-testing that punishes prudence. Instead, financially secure workers exchange entitlement for greater privately funded retirement provision.
Forced self-reliance
Singapore shows that government diktat isn’t necessarily at odds with self-reliance. Britain has already learned that lesson through automatic enrolment. But increasing mandatory contributions while the cost of living dominates the political agenda is a difficult task. So instead the Conservatives can take their newfound flexibility on NI rates as applied to different demographics, and implement it elsewhere.
A pension exchange can help employers, shift mindsets around universal guarantees, and offer a carrot to workers. After all, no one enjoys seeing deductions on a pay cheque. But it’s easier to bear when you see those funds being put to work in your own account.