SOCIAL SECURITY PENSIONS BILL (Hansard, 11 June 1975)

§ Mr. Kenneth Clarke
I am sorry that the Scottish National Party should be so reluctant to hear my last sentence, which was that the Government's proposals will be extremely costly to the contributor. As I have indicated, in all the assumptions that the Government have made about cost they have been grossly optimistic to try to conceal the facts from the working contributor. That sentence having been uttered, I trust that it is so impressive that the Minister will find himself hard-pressed to give any reply which adequately deals with the points I have made.

§ Mr. O'Malley
The hon. Gentleman is generally articulate, often talkative and sometimes quite ludicrous. There is really no connection between what the amendment says and what the hon. Gentleman has said about it.
First, I shall deal briefly with the amendment and then with the comments of the hon. Gentleman, assuming always that I am in order to refer to his comments, which seem to have nothing to do with the amendment. However, I shall not fall out with him at this time of night. I want to make some progress on the Bill and I do not want to upset the hon. Gentleman too much.
548 Clearly, if the hon. Gentleman is concerned about the position of hard-pressed workers—that is, men and women who are prepared to work, to do some overtime in a factory or at their place of employment, or work long hours in order to increase their income—and if he is worried about the level of the national insurance contributions they will have to pay, it is a very odd way to express worry when his amendments increase the primary contribution from 6.5 per cent. to 7 per cent. The hon. Gentleman is not bringing them down. If we link the amendment with other amendments, it appears that he is increasing them only for a certain section of the population, and all employed earners would do worse as a result of his amendment once it is linked with others, as a result of the tilting of the balance—well away from European standards; and we are all good Europeans now—from the employer to the employee.
Secondly, we understand the hon. Gentleman's arguments about pay-as-you-go. I have never taken the view that one method of financing the State scheme is intrinsically and inequitably right—that is, pay-as-you-go rather than funding or the opposite. The overwhelming majority of national insurance schemes throughout the developed world depend upon pay-as-you-go, and that is the case in Europe.
However, it is more important to look at our position. The simple fact is that in this country we now have 8½ million retirement pensioners. We have no inherited fund or funded scheme from which to pay the pensions of those pensioners 549 this week, next week or the week after. There is no point in going into discussions on whether the 1946 legislation, which began in 1948, should have been funded rather than pay-as-you-go. Whatever the merits of that, it did not happen. We have no inherited pension fund from which to pay the pensions of the present generation of retirement pensioners.
Therefore, if we were now to go for a system of full funding in the National Insurance Scheme, what would be required of hard-pressed earners—to use the hon. Gentleman's words—would be that they should pay two lots of contributions: first, the contributions which are necessary to pay the retirement pensions of the present generation of retirement pensioners, and, second, a whole edifice of contributions in order to pay for their own pensions when they retire 10, 20, 30 or 40 years in the future.
10.15 p.m.
Recognising that this is not a question of dogma between the two sides—at least, I hope it is not—clearly no Government could seriously contemplate moving entirely on to a funded basis. What we are doing in establishing the partnership which is implicit in the Bill and has run throughout our discussion, is trying to ensure contracting out in the upper tier of entitlement into occupational pension schemes. We all recognise that potential occupational pensioners in both the public and the private sectors in funded schemes—although for that matter, also in unfunded schemes—value highly their occupational pensions. Therefore, in their interests we would want to see their occupational pension arrangements and deferred pay arrangements thrive and flourish. There will be in the future a very large dependence on funding and I hope that we shall move to a positive yield situation and away from the negative yield situation that exists at present for the good of occupational pension schemes.
Thirdly, the hon. Gentleman said that these contributions would be a burden on our children. I remember this being said as long ago as the time of the Crossman scheme. If that argument could be levelled at the Crossman scheme—although too much was made of it then—it certainly cannot be levelled against this scheme with the same degree 550 of intensity, because we are dealing not with an alternative occupational scheme in fixed money terms but with pre-award dynamism which is the responsibility of occupational pension schemes.
We cannot say that there will be a burden on our children. None of us knows that. It depends on the amount of contracting out that takes place at the inception of the scheme and whether the contracting out builds up in the later years. The hon. Member for Rushcliffe (Mr. Clarke) shakes his head, but what I am saying is not a matter of opinion. It is a matter of fact. The problem that would confront the National Insurance Fund if there were very substanial levels of contracting out—that is, far higher than the 8 million figure used for illustrative purposes by the Government Actuary—would be, in business man's parlance, a cash flow problem.
Certainly the degree to which there will be a difference between the initial level of contributions at the inception of the scheme and the emergent level of contributions 20 or 30 years later is closely linked with the number of people who will be contracted out. But, on the range of assumptions made by the Government Actuary, we are talking about an initial level of contributions of 16½ per cent., and the Government Actuary estimated that in 30 years the total level of contributions would rise from 16½ per cent. to 18 per cent. That is a rise of 1½ per cent. in 30 years. It is a far smaller rise, incidentally, than the level of increase we have seen over the post-war period.
I think that there will be agreement that it is quite right that this nation should deploy quite substantial resources for people in old age. One of the purposes of the Bill is to get rid of the massive problem of poverty in old age.
I am grateful to the hon. Gentleman for giving us the opportunity to debate the broader question of "pay-as-you-go" versus funding, on the statement that the scheme could be a burden on our children. I am also grateful to him for making it clear that the amendment he has moved—I wondered, frankly, what he was up to—was merely being used as a vehicle to express general views, which I understand although I think he has probably made too much of them.
551 I think that the hon. Gentleman has probably made too much of those views. He puts himself in a spot when he says that earners are hard pressed. I agree. He also said we should put up the level of contributions. In proposing that the hon. Gentleman is treading a dangerous path, although I recognise that he is putting forward the amendment as a vehicle for general discussion.

§ Mr. Boscawen
Before the Minister sits down, having accused my hon. Friend of being sometimes ludicrous or articulate or talkative, will he reflect on those words? The pressure will build up in a relatively short period to help the lowest paid. I refer to those who receive supplementary benefit and will continue to do so for a long time. That will force the Government or a future Government, to increase contributions substantially, because the scheme is geared to helping those with average earnings with their occupational pension schemes. It is not geared to helping people with lower earnings.

§ Mr. O'Malley
The hon. Gentleman is wrong on that point. We discussed this matter in Committee. There is a substantial redistributive element. The fact that there is a 100 per cent. return up to the lower earnings limit is an indication of that. We have been through all this before. As to the hon. Gentleman's first comment, when a Minister is faced with a person as sharp as the hon. Member for Rushcliffe, he is obliged to use the same expertise and weapons used by the hon. Gentleman.

§ Mr. Kenneth Clarke
I am bewildered by this combination of insults and flattery. I suspect that the Minister and I are at the centre of the kind of words which were spoken during an earlier amendment. The hon. Gentleman knew what I was up to when I replied to his comments.
The Minister dismissed my remarks about funding. We made a serious attempt at a funded scheme for the future in the 1973 legislation, which regrettably the Government decided they could not go on with because they liked neither the State reserve scheme nor the long 552 build-up period. They have opted for a pay-as-you-go, earnings-related scheme. That scheme will undoubtedly be expensive.
I am reassured as a result of what the Minister said about the rate of contracting out and its bearing on contribution levels. One of the most reassuring aspects of the Bill is the fact that all Governments will have a built-in vested interest in trying to keep up the contracting out rate, because that will be the biggest determining factor on the stability of future contribution rates.
The Minister said that on present calculations only a 1½ per cent. rise was contemplated over the next 20 or 30 years before the build-up period. However, we must not overlook the fact that we start from a level, which we all accept. That level just touches the limits of the capacity and willingness of contributors to pay. No scope has been allowed for other improvements in national insurance finance benefits. However the Government will have pre-empted the freedom of action of themselves and of future Governments to a considerable extent by raising contributions to the fund to a level where contributors cannot stand much more.
The Minister has said that my amendment to raise contributions will have a punitive effect on the people in whom I am interested. Those are the contributions levels which will be imposed when this scheme starts. No doubt a small wager can be made behind the Chair, and we shall see who is right in 1977 or 1978.
I have tabled an amendment to try to bring home to the Government, through the aspect of the scheme on which they like to concentrate—the tables of glossy benefits which might accrue in 20 or 30 years' time—the reality of what it will cost in 1977 or 1978. The Government think that it is not necessary. I think that they will need fresh legislation to get the right figure when they bring their scheme into operation. I leave the Government to find out whether it is not necessary. I am happy to ask leave to withdraw the amendment to see whether the Minister of State can live up to what he said and stick to 6 per cent. to 7½ per cent. in 1978.