Rachel Holmes looks at what Gordon Brown didn’t say about pensions after the Yes vote
GORDON Brown’s speech last week at Glasgow University contained many unsubstantiated claims. One was that by voting No in the referendum, we can “keep our British pensions” – suggesting a risk that voting Yes would mean Scots endanger their state pensions. This repeated scare merits analysis.
Pensions are paid from general taxation and not, as Brown misleadingly suggested, from National Insurance Contributions (NICs) or oil. Neither NICs nor oil revenues are ring fenced, but are spent annually by Westminster on different policy commitments.
Paying NICs during your working life entitles you, under current rules, to a state pension, but the pension itself is not funded by your NICs. NICs are not invested. There is no magic Westminster “pot” of money generating income to pay pensions. Rather, pensions are paid for by current workers paying income taxes, together with other taxes (corporation tax, oil tax revenues, VAT, employer NICs etc).
The question is whether tax revenues from Scotland are sufficient to pay for the pensions of those living here. Brown’s suggestion that, without Westminster’s generosity, Scotland puts its pensions at risk is wrong. It assumes Scotland is subsidised and government figures show clearly this is not the case.
Government figures (GERS 2014) show Scotland spends less of its total revenue on pensions: 42% of Scotland’s tax revenues are spent on social protection compared with 43% for the UK. Expenditure on social protection is 15.5% of GDP in Scotland compared with 16% for the UK.
Scotland paid 9.5%, on average over the past five years, of the UK’s total tax revenues with only 8.3% of the population. Scotland receives more than 9.5% back from Westminster due to UK borrowing but, crucially, so does the rest of the UK. And, the gap between the income raised, and what is spent, is lower for Scotland. In other words, Scotland runs a smaller deficit yet funds the higher borrowing enjoyed by the rest of the UK.
Gordon Brown makes much of Scotland’s aging population. Yet he ignores analysis by respected organisations such as the National Institute of Economic and Social Research this month showing the costs of the state pension would actually be lower in Scotland due to lower life expectancy. Brown also ignores the Department for Work and Pensions which recently confirmed: “If Scotland does become independent this will have no effect on your state pension. You will continue to receive it just as you do at present.”
Brown and others talk as if the UK state pension is the gold standard. Compared with most other developed economies it is not. The Melbourne Mercer Global Pension Index ranks UK state pensions alongside Chile at C+. Denmark comes first with an A rating followed by other A and B ratings for countries such as the Netherlands, Sweden and Switzerland. OECD figures for state pensions, as a percentage of average earnings, are also dismal for the UK, putting it fourth from the bottom, alongside Mexico, out of 42 countries.
It could be different. Norway, similar in so many ways to Scotland, has the biggest sovereign oil wealth fund in the world. The annual income from their protected investments pays Norway’s state pensions and will do so for years to come. The Norwegians invested their oil. The UK never did.
Scotland is not subsidised by the UK. In September there is a chance to put Scotland’s revenues, including substantial oil revenues, under the control of the Scottish Parliament. Scotland’s income, for the first time ever, will be saved and invested for the future. For me, that is the more secure option for my pension. «
Rachel Holmes is an experienced Chartered Accountant and university lecturer in Edinburgh, teaching finance, taxation and investment