Generational theft and social care – how to end the crisis

Generational theft and social care – how to end the crisis

by Eben Wilson
article from Monday 26, February, 2018

TODAY’S YOUNG PEOPLE have inherited two deeply indebted Ponzi schemes from their parents and grandparents; the state pension and social care.

A Ponzi scheme is an assurance offer that promises high pay outs based on false actuarial calculations. It relies for survival on a continuously increasing number of people paying in to support its inflated promises.  Private Ponzi schemes always fail, and are banned in law as frauds.

State Ponzi schemes have survived by becoming tax transfer schemes; pay outs to today’s recipients (such as pensioners) have no link to incoming contributions (from current workers’ tax payments) – while shortfalls are often funded by new debt. In reality, Beveridge’s 1944 scheme, which was meant to be contributory, floundered early.

The arithmetical burden of our state’s social welfare promises is heightened by contradictory political incentives to providers and recipients.  Politicians need to be seen to care to obtain votes but do not want to raise taxes, while voters want someone else to support their needs and are against cuts to the transfers, paid by others, they expect to receive. This skewed arithmetic is then made more brutal by the extension of life expectancy and lengthened end-of-life frailty.  This combination grows both the number of recipients of welfare transfers and the length of time they are required.

So, younger generations are now punished by schemes that are bankrupt yet still cash hungry, with a locked management denying change.   

Inevitably, these nationalised collective schemes have become victims of socialist rationing.

Rationing of pensions is done by increasing the state pension age (which creates protests amongst those that have to wait longer before eligibility) and, in social care where, well, we haven’t worked that out yet… Today it appears that we are rationing by unavailability of services. Care homes, home care support, care professionals and care funding are all dissolving away.  There is, in my view, a genuine crisis.

What can be done? The first step is to accept that we cannot continue with a state Ponzi scheme. Adding two percent on council tax or hypothecating a social care tax are simply sticking plasters over underlying rot; they play into the hands of the self-interest of politicians and bureaucrats, giving them succour to continue their hand-wringing and false compassion until the Ponzi arithmetic goes wrong again. We will then be back where we started; but with a higher tax burden, slower economic growth and more debt to service. In my book that’s a moral wrong; it impoverishes our children and their children to solve our mistakes.

There is, however, a way out – and it allows our children to achieve it, because they have two important assets; compound interest and time.

In brief, we need to allow our children to opt out of the present system.  They need to set up their own contributory scheme. It would work like this, and cost the state nothing.

1) First, anyone under 25 should be allowed to have a Personal Providence Account (PPA) into which their current NIC payments are paid, opting out of today’s centralised system. This money can be invested. As an incentive, an initial 2.8 per cent reduction in the Employer’s NIC charged would be applied to under 25s, enhancing their employability.  This reduction is self-funding because any future in-work support would be paid out of their PPA funds. Other reductions could be offered if opt-outs were also taken on rights to housing or other support.

2) A percentage Welfare Equalisation Contribution would then be taken from all Personal Providence Accounts. This is similar to the equalisation tax precept used today in Holland and Belgium for social health insurance which pays for those who cannot afford care.  

What rate would be required? The actuarial arithmetic of these contributions is complex; you have to start from today’s zero-funded Ponzi position where our NIC contributions are less than half of what is spent on social support.

The goal is the creation of an asset-rich self-funding regime; setting up a transfer process from the state to future sustainability using self-funded PPA holdings. It is the gains of those funds which wipe out the liabilities of the present system and eventually fund the social needs of all individuals.

My expectation is that the initial equalisation contribution rate might be as high as 60 per cent; this merely reflects how much young people are being robbed by the present system; the 40 per cent they retain is their get-out-of-jail card from today’s Ponzi debts. However, the scheme would also include a statutory promise that this rate would reduce automatically as the funded system’s assets grow. The reduction would happen as today’s over-funding through general taxes disappears along with that tax burden. This is again a tax neutral shift from the state to PPAs – and is painless to the individual.

3) A Central Providence Fund would also be set up to receive all equalisation tax revenues. They are then available to the state’s total support budget. However, all incoming revenues and outgoing transfers into and out of the Central Fund must be transparent. The present fund-less state Ponzi scheme hides these transfers from us; skewing shared incentives that might change democratic opinion about social support spending.  This is a people’s fund, not a fund open to political manipulation. 

A high initial Equalisation Tax rate could at least be presented as honest; the older generation coming clean with the younger about the liabilities accrued to them by today’s elderly. It makes the adverse arithmetic clear.

4) Now a key measure that could speed up this change. All PPA funds would be transferable as a tax deductible payment if used for social care. In short, anyone can look after granny or grandpa, a distant relative, or even others in a mutual collective if they are so minded. This transfer right would initially be restricted to care support only, and not to healthcare or pension support.  The tax deduction would be against an individual’s Welfare Equalisation Tax obligations; although they could provide additional support by depleting their PPA fund.  These private moral choices would then add to total social transfers at zero tax cost.

If you do the calculations on this scheme for Scotland, you have a starting point of around 700,000 people over 16 and under 25 (although 10 per cent of these are unemployed). Median gross pay is £200 per week at age 16 and double that by 25.  Annually, the average NIC that would be paid into PPAs would be around £1500 (employee and reduced employer). PPA funds of these younger taxpayers would accrue around £945 million annually, represented by £378 million after a 60 per cent equalisation tax with £567 million going to the Scottish Government via HM treasury.

This is where the value of compound interest becomes clear.  If you earned 2 per cent more each year for 20 years, and the Welfare Equalisation Tax was reduced at 2 per cent a year to 10 per cent through those 20 years, the PPA fund of even these lower earners would be just over £30,000; after 40 years at retirement £130,000, enough to fund care through end of life frailty.

We should not be surprised by this as we have evidence from two international systems that tell us this can indeed happen:

– In Australia its 25-year-old contributory superannuation pension scheme now has more than 2.3 trillion Australian dollars in a funded pot;

– while Singapore has a 363 billion dollar providence fund for social and health care.

The encouraging opportunity is that Scotland already has the beginnings of a funded contributory approach in the form of the Personal Independence Plan for the disabled. This has a billing thus:

The Scottish Government believes everyone should be in control of their life. Some people need support to lead an independent life and advocacy to be empowered to make important decisions about their life”. 

Of course there is a glaring error here; it isn’t “some people” that need support, it is everyone who needs support because we all get old and we all face hazards on the way to old age; we should also all have the liberty to control our lives, and it is the younger among us who must have that longer term need recognised and allowed to make good decisions – unlike their grandparents who chose socialism.

The range of state controlled support is very long and some of it is allocated to younger people. There is no reason (despite its love of power over all of us) why the Scottish Government could not take some of these support funds and declare them to be de facto inputs to a Central Providence Fund for those under 25 on the Singapore model. This would effectively give their taxes back to them, but in escrow. The fund could then be separated into equalised individual PPAs; and an equalisation tax applied.  At that point they could call the bluff of Westminster (which they love doing so much) and demand that the NIC contributions of young Scots be allocated into the Scottish Providence Fund as a matter of course.

Scotland could then be genuinely honest and different, carving itself a pathway out of the state’s bankrupt Ponzi schemes; using the time available to the younger generation and the benefit of compound interest to reverse the huge mistakes of mid-twentieth century socialism.

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