Why George Osborne's pensions reforms matter so much, and why Ed Miliband needs to confront them

Why George Osborne's pensions reforms matter so much, and why Ed Miliband needs to confront them

Were I one of Ed Miliband’s advisors, I’d print out the following chart and slip it under his door as quickly as possible.


It’s from Thomas Piketty’s new book, a breathtaking analysis of wealth and incomes stretching back centuries. And the point behind it is rather simple: many parts of the Western world are becoming more reliant on inheritances than they have been since the early years of the 20th century.

Look at the most recent decades: inheritance flows in the UK haven’t picked up as quickly as those in France and Germany. Well, intriguingly as far as The Economist‘s Buttonwood is concerned one of the explanations is those strict rules on annuities that George Osborne has just abolished (though Piketty reckons the recent UK figures understate reality a bit anyway).

In other words, the Chancellor’s pension reforms are likely to push up the UK line in the chart above, making Britons more reliant on inherited wealth than they have been for decades. Think about it: up until these reforms, much of what families had saved in pensions was tied up in annuities, which both prevented pensioners from spending it all as they saw fit and redistributed a chunk of it into the tax system (because of punitive taxes on withdrawals) and into the insurance industry (the malfunctioning annuity market). In future, grandpa and grandma will be able to hand down that money – whether in a formal inheritance or merely a “gift” of a deposit for a grandchild’s first property.

The Chancellor may not have framed things this way, but when you consider it, what he unveiled last week was an intriguing Conservative solution to one of the biggest economic problems of the moment: intergenerational inequality. As the FT has documented in a great series of analysis pieces, for the first time in modern history, the youngest generations are no longer able to expect to earn more than previous generations. The Chancellor’s reforms will reduce the friction preventing the elderly from passing that money onto their children and grandchildren.

And if that point weren’t already clear enough, up popped the Prime Minister yesterday to underline it. Speaking at a meeting in East Sussex, he hinted that he might be inclined to reduce inheritance tax after the next election, adding: “I believe in people being able to pass money down through the generations and pass things onto their children. You build a stronger society like that. Of course you have to have caps and limits and you have to think about those – but generally we should be encouraging people to pass things on to their children.”

And who could disagree with sentiments like that? There is something deeply Conservative about giving pensioners themselves the right to choose how they spend their money (while the lefties think the Government knows better how to manage people’s money).

The Conservatives are making a very clear political statement: while, for the time being, we may redistribute some of your annual earnings through income taxes, we will do what we can to reduce the taxes and constraints on your assets.

That means reducing inheritance taxes, cutting pensions constraints and taxes and refusing to countenance a mansion tax. The upshot is that, for better or worse, British families will become more reliant on inheritances (and bear in mind the IFS already thought we were heading in this direction before these reforms). Those lucky enough to be born into wealthy families will have even more of a head-start.

Piketty’s solution is quite different, and considerably more left-wing: to levy a tax every year not just on the value of the property everyone owns but also all the other assets. To an economist, such a proposal seems rather logical; to a politician it sounds like suicide.

The entire experience of the past century has suggested that attempting to levy a tax on assets would be electoral madness. Keynes toyed with the idea of a capital levy after the Second World War (intriguingly he was backed up by Friedrich Hayek), but Attlee stopped short of it. Since then, every political party has attempted to use the tax system to encourage people to procure assets (mainly property) rather than to penalise them for it (as an asset tax would do).

Does anything in the experience of the past few years change that? It’s not clear.

On the one hand, there is clear disenchantment, particularly among younger generations, with the latest asset price boom triggered by quantitative easing. For many, getting on the property ladder is so unrealistic a prospect that they would much rather the Government legislated for a fall in property prices than a rise. This is the first political cycle in which home ownership levels will be lower at the end than at the start.

On the other hand, the young don’t vote as much as the old. And older voters tend to own more assets.

The Conservative proposal may well help address concerns about intergenerational inequality (in other words within families). But unlike the asset tax solution, it does little to address concerns about inequality between families – in other words across the economy. This is on the rise – although it remains far lower than during the early 20th century, according to Piketty’s numbers.


That is the political challenge for Ed Miliband. Most Westminster insiders seem to assume that it’s all about the personal choice vs paternalism question. That’s part of it, but I think it’s also about something far deeper: whether the Government wants to endorse or to try to reduce inheritance flows and, more broadly, whether it needs to intervene to prevent levels of asset inequality between different families from growing even wider in the coming years.

Pensions and savings are, along with property, a fundamental element of that. Will Ed Miliband confront the issue? So far, his body language suggests he’s entirely unaware of it. The Labour responses to the reforms have been worthy, but also a bit mealy-mouthed and micro. Miliband himself is still rabbiting on about the “cost of living crisis”, seemingly unaware that it is already coming to an end.

He should think a bit more broadly. There are far more meaty issues at hand: whether asset prices are rising too fast; whether property ownership should really be incentivised through the tax system; whether it is the government’s role to attempt to tackle asset inequality – and how, in a world where it is rising everywhere, that might be done. 

I don’t know the answer to these questions – nor do I have any particular boat in this race. I can’t imagine anything like Piketty’s proposal getting a look-in on any major party manifesto. But all the same, given how significant an issue this is, it would be refreshing to hear a genuine debate on it.

Now that George Osborne is starting to map out a clear Conservative prescription, it’s about time we heard a clear alternative from Ed Miliband. So someone slip a few of these charts under his door and let’s see what he comes up with.