The Daily Mail betrays middle Britain on pensions

The Daily Mail likes to think it speaks for middle Britain, but too often it confuses the interests of the super-rich with those of middle income earners.

The Daily Mail likes to think it speaks for middle Britain. And sometimes it does, even if in ways that will not be congenial to progressives. But too often it confuses the interests of the super-rich with those of middle income earners – and seems to forget that a good proportion of those in the middle work in the public sector, including many of their readers.

How else can we explain today’s contrived pensions story? This seems to be saying it’s unfair to increase tax on those earning more than £150,000 when the real priority should be attacking the pensions of nurses, civil servants and other public servants who do have incomes around the median income of £22,000 or so.

The Mail says:

“Private sector workers will take a £4.75 billion hit to their pensions to pay for the economic recovery – while public sector workers will escape cuts.”

Let’s take this to pieces.

The private sector workers here are those earning more than £150,000. They are having their tax relief limited to bring it down to the same level enjoyed by the vast majority of the Daily Mail’s readership.

Pensions tax relief is one of the biggest hand-outs to the super-rich in the tax system. Until the Chancellor announced these changes in the pre-budget report (the budget only had a few follow-up details) everyone enjoyed tax relief on pension contributions at their marginal tax rate.

This is not widely understood, but it works like this. If someone pays a pound into their pension scheme, the amount of income on which their tax is assessed is also reduced by one pound. Someone paying the standard rate of income tax of 20 per cent will therefore save 20p (as there will be one less pound from which 20 per cent tax is taken.) But a higher-rate tax-payer, paying 40 per cent marginal tax, will save 40p (as there’s one less pound on which to charge 40 per cent).

In other words it costs 80p for a standard rate tax-payer (ie the big majority of working Daily Mail readers) to put a pound in their pension while it costs only 60p for a higher rate taxpayer.

Not surprisingly higher rate tax-payers take full advantage. In 2007/8 tax relief cost £37.6 billion – 2.7 per cent of GDP. This tax relief is heavily skewed towards the well off. 60 per cent goes to higher rate tax payers and a quarter of tax relief – nearly £10 billion a year – goes to the one per cent of the population who earn more than £150,000.

Rightly the Chancellor has seen this as an easy way to help raise funds. The rationale for tax relief on pensions is that it encourages people to save so that they have a decent income in retirement and will not be dependent on the state’s means-tested benefits. But it is hard to justify spending money on encouraging those who will have a substantial retirement income to make it even bigger.

Contrary to what the Mail says this change in tax relief will affect top earners whether they work in the public or private sector. Public servants have the same tax relief regime as private sector workers.

But there are very few public sector staff who earn more than £150,000 a year, and a tiny number who earn substantially more than this. Changes in tax relief for the super-rich will therefore have little effect on public service workers as the super-rich work for banks and hedge funds not the NHS.

nd while many will be concerned at the growth of high salaries in the public sector, this is a contagion that has spread from the private sector where wage growth for those in boardrooms has been outstripping their employees’ pay packets for years.

But of course there is no pension story that cannot in the Daily Mail be turned against public sector workers.

Over at the Times (read it on-line while you can) Antonia Senior trots out the standard lines against public sector pensions in an article about the costs of an aging society. It’s a pity they don’t include the graph online that is in the print edition – as that shows that the one area of spending on the elderly that doesn’t soar is the cost of public sector pensions. Treasury estimates are that these currently cost 1.7 per cent of GDP will rise to 1.9 per cent in 2019 and then fall again.

The challenges for the Treasury are long-term care, the health needs of an aging population and the costs of state support for pensioners. Importantly the costs of public sector pensions are not offset by either employee or employer contributions in these figures or the chart.

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