Changes in the pensions industry are very slow coming. It seems that there is an innate conservatism that resists any idea of radical thinking to resolve problems that arise, even when longevity increases are of such scale as to fundamentally undermine the main principles the industry has rested upon over the last 100 years.
That’s why it’s refreshing to see some original thinking from the thinkers at the Social Market Foundation a cross-party think-tank looking at social and economic issues. Their challenging new idea is to promote the idea of “Facebook welfare”, an idea that aims at putting social relationships at the heart of all welfare supports.
The idea is very clever as it replicates the current approach of society supporting those in need but brings a personal level of connection to that support instead of the anonymity of the governmental approach.
At its simplest, the idea is that each citizen would open compulsory Lifecycle Accounts into which a defined proportion of their gross income would be paid. In the event of unemployment occurring, this fund is used to top-up basic state benefits to bring earnings up to 70% of previous levels. This money is then repaid from future earnings. If insufficient money is there, a loan is given from the account that must be repaid.
The really clever part is that three friends or family members must guarantee this account. They would be on the hook if the loan is not repaid. At retirement, what remains in the fund is used to provide an annuity to top-up the basic state pension.
“Facebook welfare” hits a number of key points that bedevil the current approach to pensions and welfare. It ensures that there is a direct connection in the minds of the individual between what they save and what they receive. They also stop seeing the government as an anonymous backstop because they can see that failure to earn and repay loans directly hits people they know rather than an anonymous group of taxpayers.
It removes employers from the equation, putting the onus for protection and pensions back onto earners where it belongs. And finally, it provides a level of equality because taxpayers are supporting all citizens to the same extent with a floor level of unemployment benefit and pension instead of providing higher levels of pensions to public sector employees than it does to private sector workers.
While a lot of the detail is still to be worked out, there is clearly a lot to be said for using this kind of easily understood approach to provide a radical solution to the problem of pensions and protection. The Social Market Foundations thinking is certainly a refreshing change from so many expert groups and they deserve a lot of credit for pushing the boundaries of the debate.
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