Who wants to be a millionaire?

… I don't.
Have flashy flunkies everywhere? I don't.
Who wants the bother of a country estate?
A country estate is something I'd hate.
Who wants to wallow in champagne? I don't.
Who wants a supersonic plane? I don't.
And I don't 'cos all I want is you.
etc Cole Porter (High Society, 1955)

But before one turns one’s back on wealth, what defines a millionaire in modern Britain? Ed Miliband, in his ‘One Nation’ Party Conference Speech in October, said:

… What do [the Government] choose as their priority? A tax cut for millionaires. A tax cut for millionaires. Next April, David Cameron will be writing a cheque for £40,000 to each and every millionaire in Britain. Not just for one year. But each and every year. That is more than the average person earns in a whole year. At the same time as they’re imposing a tax on pensioners next April. Friends, we, the Labour Party, the country knows it is wrong. It is wrong what they’re doing. It shows their priorities. And here’s the worse part. David Cameron isn’t just writing the cheques. He is receiving one. He’s going to be getting the millionaire’s tax cut.

So his definition of a miilionaire was someone earning £1 million or more a year. I wonder if Cameron actually achieves that, even with private income on top of his PM’s salary of £142,000. But for other people the definition of a millionaire is the less demanding one of someone who has wealth of over £1 million rather than that amount of annual income. But what is wealth? The Office of National Statistics (ONS) has been engaged for some time in a Wealth and Assets Survey. This has been producing some interesting data, for example the regional (particularly north-south) variations in wealth in the UK (to be in the wealthiest 10% of households the asset level is £967,000 and over – not quite £1 million), shown below. I suspect that the SW region, if sub-divided,would show a gradation from darkest to lightest, east to west. 

But their approach poses a problem in definition, as the pie chart below makes clear. It shows how the “economic wealth” of all the households in the UK, about £10 trillion (or £1000 billion) was defined for the purposes of the survey:

As can be seen, about 46% is in the form of private pension investments and another 33% in property. The relevance of either of these to personal affluence is arguable. A private pension investment is a constrained form of wealth because it can only be accessed as an annuitised income stream (usually a pension) after a certain age until death. While in payment it is subject to income tax. As far as property is concerned, certainly for the owner, net of any mortgage, it is an asset which can be realised. However, we all have to live somewhere at some sort of cost.

These distinctions matter when people start to throw around numbers relating to pensioner millionaires and the fairness of them receiving benefits such as the winter fuel allowance during a time of austerity. Take, for example, Rachel Sylvester in The Times at the end of October:

According to a forthcoming report from the Intergenerational Foundation [IF], the number of wealthy pensioners is rising rapidly, with almost 2 million people over 60 in households with assets above £1 million and 988,000 millionaires over 65. Its analysis concludes that the Government is spending about £500 million a year on winter fuel allowance and free bus passes for millionaires. That can’t be right. The motto “we’re all in it together” is only valid if it applies to old and young, as well as rich and poor.

Indeed “That can’t be right” if only because there are several things wrong here. Firstly, there’s a clear misinterpretation of what IF said in their report. They do provide an estimate of nearly 2 million (1,855,300 actually) people over 60 in households with assets above £1 million. And also 988,600 over 65 – but that is the number in households worth over a million, not individual millionaires. The distinction is important because the average household size for the over 65s is 1.39. Well, that’s what IF say (Table 5). Now, if Ms Sylvester and her spouse wanted to split their combined assets they would probably choose to divide them equally. And if those assets were less than £2 million, neither of them would expect to be classified subsequently as millionaires.

There is a more fundamental issue lurking here relating to private pension investments. How should their value be treated once turned into an income stream? Secondly, why ignore the value of public sector pensions prior to payment? One way of avoiding this is to look solely at income. Last month Chris Skidmore MP, one of the Free Enterprise Group of Tory MPs, produced a report with the snappy title of A New Beveridge: 70 years on - refounding the 21st century welfare state, with a section on Wealthy pensioners (page 19):

There are 100,000 households with a retirement income of more than £100,000 a year, and 988,000 over 65s in Britain who have assets worth at least a million pounds.

Neither of these figures is supported by a reference and the second is repeating Sylvester’s error above. Anyway, the report recommends that:

… the richest pensioners with separate incomes over £50,000 should no longer receive winter fuel allowance, a free bus pass and free TV licenses. (page 3)

While this avoids looking at wealth per se, it repeats the well-known anomaly of the child benefit ceiling, but for an older age group. For example, the household consisting of a former high-flyer, now with a £80,000 pension but whose spouse never worked possibly to help them get there, would receive fewer benefits than one with two less starry £40,000 pensioners and would also pay a lot more income tax! In a relatively early post here in February 2011 on the same subject (then raised by the Institute of Economic Affairs, which provides the Free Enterprise Group’s “administrative support”), I commented:

It is a matter of political judgement as to whether the ire of a particular group in society and consequent loss of votes is worth incurring.

Nothing seems to have changed yet, but if the economic situation deteriorates further, some withdrawal of these benefits seems inevitable – and at below £50,000 pa as well.

IF do do that voodoo

Do do that voodoo that you do so well.

For you do something to me that nobody else could do!

You do something to me, something that simply mystifies me.

Cole Porter

Last year I wrote one of the most hit-on posts on this blog, a critique of David Willetts’ book, The Pinch: How the baby boomers took their children’s future – and why they should give it back. The Pinch has an exalted status, for example in the Spectator on 5 May, Polly Toynbee described it as an “excellent analysis of inequality between generations … [it] should be compulsory reading for the cabinet.”

So it’s no surprise that The Pinch seems to be one of the seminal texts of the Intergenerational Foundation (IF), established to promote fairness between generations. The IF is a registered charity, with no party-political allegiances. From its website one can ascertain that it is based at 19 Half Moon Lane, Herne Hill (in SE London), over the Illusioneer magic shop – “Front entrance via magic shop door, just ring the white bell”, and that it has yet to submit formal accounts to the Charity Commissioners.

Perhaps it’s the influence of the people downstairs, but the IF seems to like to do a bit of conjuring with its statistics. After all, that’s what captures an audience like the Daily Mail’s, which on 10 May ran a story headed Nearly 80,000 public sector pensioners currently paid more than average private sector WORKER. Followed by:

Around 80,000 retired public sector workers get a gold-plated pension which is bigger than the annual salary paid to the average British worker, a shocking report warned yesterday.

The Daily Mail was drawing on a recent IF report and quoted “Angus Hanton, co-founder of The Intergenerational Foundation, [who] said the report demonstrates the true scale of the ‘pension apartheid’ in Britain.” Altogether a kinder treatment than the one he received from the Mail on Sunday on 22 October 2011 under the says-it-all heading, The man who says pensioners should leave their 'empty nest' homes... and the £1.5m five-bedroom des res where his parents live alone, and which went on:

Last week Angus Hanton and his Labour-backed think-tank launched a report saying that ‘empty nesters’ should be ‘encouraged’ through a new land tax to downsize. This, it was argued, would help make room for younger generations. Not surprisingly, the proposals caused anger and concern among older people – most of whom until last week probably hadn’t heard of Mr Hanton or his Left-leaning group, the Intergenerational Foundation, which is championed by Shadow Minister for London Tessa Jowell.  

After hearing him outlining his radical ideas on the radio, they might have spared a thought for Mr Hanton’s own elderly parents. What kind of shoebox dwelling did he have them holed up in? In fact, The Mail on Sunday can reveal that Alastair and Margaret Hanton live alone in a £1.5 million five-bedroom home in one of London’s most desirable suburbs. So has their son – himself a father of four who, incidentally, lives with his family in an £850,000 house nearby – tried to harangue them into vacating it?

But going back to the more recent Mail story, the article’s title and first sentence are contradictory. The ‘nearly 80,000’ number of public sector pensioners comes from the IF report’s Figure 6 (below) – 78,186 to be exact – which it isn’t, given the omission of local government and police retirees from the data.  (The IF seem to have ignored the pensions of former MPs, ministers, judges and colonial service employees as well).

More importantly, the comparison can be made with the pay of either the average private sector worker or the average British worker but not both at the same level. Because, of course, the latter includes British workers in both the private and public sectors. According to the IF report, £25,900 is the “average annual salary” from the 2010 Annual Survey of Hours and Earnings, published by the Office of National Statistics (ONS). The latter makes it clear that in April 2010 “Median gross annual earnings for full-time employees (including those whose pay was affected by absence) were £25,900”. The median (like the mean and the mode) is a form of “average” - the one whose value is set half-way, so 50% of full-time employees were earning less than £25,900 and 50% were earning more.

So how many full-time employees, private and public, were there in 2010? According to the ONS Labour Market Statistics for June 2010 “The number of people in full-time employment was 21.10 million in the three months to April 2010”. So half of them, that is 10.55 million, must have been earning more than the median, or, as IF and the Mail like to call it, the average.

Now here’s a “shocking” thing the Mail could have got its teeth into. According to IF over 97% of the 2.25 million* public service pensioners in Britain get less than the average British worker. And fewer than 80,000 get pensions as big as the pay of the 10.5 million people who earn more than the average. Nearly half of these were in the NHS and were, presumably, mostly retired medical staff. Consultants and surgeons get modest pensions shock?

That there is a problem in the long-term in financing pensions in general, including those in the public sector, is beyond dispute. The problems which IF identify are familiar from the Hutton Report and some of the measures recommended by IF, like the abolition of final salary schemes, are already in hand. Quite why the IF report devotes so much space to the changes to the BBC's pension scheme, when no relevant statistics are quoted from it, is unclear. One of IF’s proposals might have caused some alarm to certain Mail readers, if they’d been told about it:

[The government would] Impose a progressive tax on the highest public sector pensions … without having to re-draw existing contracts [by levying] a progressive tax on public sector pensions that are above a certain threshold (for example, £20,000 per year). Two consecutive governments have set a precedent for specific taxation of certain types of income with their tax on bankers' bonuses, which was designed partly to avoid having to re--‐draw existing contracts. To ensure it was progressive, the tax rate would have to rise with the level of pension (so people on higher pensions paid more).

£20000 per year is, of course, about 75% of the “average British worker’s salary” and an awful lot less than the remuneration of a typical bonus-receiving banker.

I’m afraid this is where the magic coming up through the floorboards in Half Moon Lane must have started to turn into voodoo. Do IF not realise that anyone lucky enough to have a pension much over £40,000 would be a 40% taxpayer anyway? IF must be very naïve to think that there would be any political mileage in bringing in penal taxation of the sort they are advocating. They run a real risk of losing what credibility they have. After all, another recent IF report proposed ‘all-young-person shortlists’ for parliamentary candidates (as if so many didn’t lack experience of the real world already) and additional votes for parents. Requiring a different electoral system and the abolition of one person, one vote, these 'Solutions' really were baying at the (full) moon.

One has to concede admiration, albeit grudgingly, for the entrepreneurial zeal of those who are creating jobs for themselves and others on the intergenerational bandwagon.  "Fairness” is ultimately no more achievable than perpetual motion and underlying all the messaging about it, from IF and others, one can detect a large dose of the politics of envy and of “we want what you’ve got after a lifetime’s work, and we want it now”. Perhaps a closer study of Figure 2 of the IF report will provide some consolation to the young?  Somehow I can't imagine IF's adherents wanting them to lobby for increased inheritance taxes .

* 2,248,371 total ‘Pensions in Payment’ across the ‘Individual Public Sector Pension Schemes’, pages 14-16 of the IF report.