The International Monetary Fund (IMF) has provided yet another weapon for the socialists to wield in their war against free markets. The IMF published a report with the suggestion that the Baby Boomer generation could work into their 70s to save the economy: “70 is the new 50.” The IMF is not immune to political pressure, hence why it has chosen a solution that delays the unavoidable problems associated with state pension provision. This provides fertile ground for the socialists who seek to berate free markets and expand popular support for their political system.
Socialist commentators like Owen Jones say that workers create the wealth in society, therefore, the pension age should not be raised so they can enjoy retirement after benefitting society by creating so much wealth. Jones believes that it’s only the workers who can create wealth through inputting value into goods and services that are then bought by society.
Firstly, value comes from the consumer. The consumer inputs value into a good or service when they voluntarily purchase them. An individual could sit and make eccentric mud pies all day yet no one will desire them; apart from perhaps a decorative usage, they offer no value. A simple example such as that should make the reader question whether it is in fact workers that create wealth for society. There is a sense in which workers create wealth since workers do create, for example, the screws that are helpful for society’s growth. It seems intuitive but is entirely false.
If it’s true that subjective preferences from the consumer create value in the screw, then someone must have anticipated and gambled that the screw can have value for a consumer. The entrepreneur plays this role in the creation of wealth. They take an informed bet and start a production process for a screw that may have value for the consumer. The entrepreneur provides the capital and then hires the workforce to create the screw which is then possibly purchased by the consumer since they decide its value. If the screw is utterly worthless and the entrepreneur guessed the preferences of the consumer wrong, it will not be purchased. Have the workers created value for society in this instance? This illustration combined with the mud pie scenario demonstrate that there is no coherent explanation for why workers solely create wealth for society.
Furthermore, if you take Jones’ logic to its conclusion, a rather grim outcome becomes reality. If it is true that only workers create wealth, if one type of screw stops being bought, should the workers receive no compensation for their toil? They have not created wealth for society since no one has purchased it. To demonstrate further deficiencies in this worldview, imagine a scenario where the purchases for that screw fall significantly, but not to zero. Should the workers receive a compensation cut as a result? One anticipates that a socialist may retort by explaining how modern factories produce many variations of a single idea. This is true; it is often the case that a factory produces many types of products in a single building rather than one product. So, the successful purchasing of the other products can make up for the loss for this one screw, meaning the workers need not receive a cut in compensation. Rather, they siphon the compensation from others so no one’s financial security is harmed. However, this too violates their logic since it was another worker who created the wealth with these other products, so why are the screw makers entitled to wealth they have not created? There is a huge vacuum in this socialist logic that sucks all coherency and reason into it.
The British pension system is a ticking time bomb, consisting of over £2 trillion of liabilities. The United Kingdom uses a pay-as-you-go system for our pensions. Workers pay the national insurance tax that goes towards current pensioners, and once current workers reach retirement age they receive a pension from national insurance of then-current workers. There is a common belief that the government is putting tax money away into a fund which matures when your reach a certain age. This is simply not true; the money received in the state pension is not the recipient’s money. However, it is also not the case that all £2 trillion of the liabilities will be needed at one time, so it’s specious for opponents of the system to catastrophize the problem more than it deserves. Still, over three quarters is not funded.
Given that the United Kingdom’s population is aging more and more by the decade, there will come a time when decisions will need to be made to deal with the liabilities due to its unsustainable trajectory. The options for the socialists are minimal. They could raise the retirement age to kick the can down the road but they have shown no willingness to do so. And they certainly do not want to do away with retirement. They could reduce the pension amount promised to people, but they already say that the British state pension is amongst the lowest in the world, so that is not an option in their eyes.
This leaves them with few options; the most favorable being amassing the funds to ensure retirement through taxation. Wealth taxes are becoming very popular amongst the left in the United Kingdom, with high income earners targeted since they have the broadest shoulders (to use their terminology). Wealth taxes are particularly favorable since, as they explain in one example, a football stadium owner cannot move their football stadium out of the country. This is true but incredibly misleading. The physical property cannot be moved but the content can be, and will attempted to be.
For an illustrative example, continuing the exploration of the football club owner analogy, let’s say that a football club owner manages a club in League 2 of the English Football pyramid (the fourth highest league in England, for American readers). The club is performing well after the takeover; investment is flowing in due to the owner being liquid enough to invest. Let us assume that the socialists implement the bare minimum level of wealth taxation, a 2% rate. For our football club owner, it’s entirely possible that they were on the margin to begin with and the 2% rate pushes their investments into a loss territory. Since the owner is very liquid, they can afford to acknowledge the tax making their investment unprofitable and move their investments abroad. There are hundreds of entrepreneurs in this position. The rosiest of assumptions were made for the socialist’s benefit, but history suggests they would implement far more sweeping, much higher wealth taxation. More projects and investments would become unprofitable and the outflow of millionaires would become a torrent.
Moreover, this entire discussion is taking place within a vacuum. The pension system bolstering demanded by socialists is not the only area of the state they seek to grow. Other welfare state measures need to be improved upon and the climate crisis has still not been mentioned, which will require huge expanses of cash to prevent. Will higher taxation on wealth and income cover all these measures? With millionaires leaving and growth stagnating, the prospects look bleak.
The pension system is broken and it will collapse dramatically if left unchanged. However, faulty socialist logic cannot be ignored. Why, if it be the case that workers create wealth, should their wealth be involuntarily siphoned off to a person unbeknownst to them to fund their retirement? It is not their wealth. Socialists feel a violent empathy where some of the wealth a worker creates is their own but some is owned by others who are in need. This is the equivalent of creating a gordian knot of logic which cannot be straightened out to be forced into any semblance of coherency.
The people of the United Kingdom are an extremely generous and charitable people. Even those with very little sometimes find the time to give away what little they can. However, since 2019, the number of people donating has taken a dramatic fall. It should be no surprise given the results from persistent state intervention smashing the wealth creating processes of the free market. Individuals should not be forced to pay for someone else’s retirement. Given the charitable instincts of the population, voluntary donations to those who fall on hard times at an age of retirement will no doubt come to the fore but we cannot expect this until we take the boot of the state off the neck of the wealth generating engine that is voluntary exchange within a free market based on sound principles of private property ownership.
