How pensions came of age

Pension reform is one of the most difficult issues facing New Labour. On the one hand its rhetoric about social justice demands higher public spending, on the other its electoral reliance on "middle England" is predicated on chancellor Gordon Brown's "prudence" (for which read parsimony). John Macnicol's fascinating account of the development of pension policy in Britain is therefore a timely reminder that the politics of redistribution and of retirement have always been intimately linked.

The central contribution of Macnicol's intelligent study is to show how the twists and turns of pension policy over this period symbolise the wider social and political processes set in train by the arrival of mass democracy and rapid technological change. As the opening sets out, 19th-century social reformers generally believed that widening the electoral franchise would lead to unstoppable demands for the wholesale redistribution of wealth, with unconditional taxfinanced pensions at the top of the working classes' shopping list. Moreover, they also recognised that demand for older workers was in inexorable decline, bringing the danger that many elderly people would become reliant on the Poor Law, thus undermining the strict eligibility conditions on which that system was based. Some movement in the direction of state-provided pensions was therefore seen as inevitable. Accordingly, Macnicol views the introduction of tax-financed state pensions in 1908 as a natural response by liberal social reformers to the more radical demands of socialists and to the need to rationalise help for the elderly poor in the face of industrial change.

The real puzzle is to explain how the highly redistributive scheme of 1908 was supplanted in 1925 by a social insurance system explicitly designed to curtail income transfers between the classes. Macnicol's intricate piecing together of Civil Service minutes, official committee reports and House of Commons debates makes compelling reading. The tale he tells - of how a clever bureaucracy defeated an ineffective and divided labour movement - is entertaining and convincing.

The latter half of the book looks at how mass unemployment and growing concern about population ageing during the 1930s affected the pensions debate, and how this was reflected in the Beveridge report. Foremost it is the story of how the Trades Union Congress and the Labour Party, through linking pensions to the debate about unemployment, came to see state benefits for older people as a way of institutionalising retirement (and hence reducing unemployment) rather than as a badge of citizenship and an instrument of redistribution. Moreover, the straitened economic conditions of the Depression, and the belief that politicians would always resist anything labelled a "tax", also led the labour movement to embrace the contributory principle that was anathema to earlier generations. In effect, Macnicol argues, much of William Beveridge's work in containing demands for a more radical redistribution of wealth had already been done for him. Rather than replacing Neville Chamberlain's 1925 scheme, Beveridge was able merely to tidy it up, leaving its central principles intact and hence setting a natural limit to benefit levels.

The analysis throws up numerous interesting paradoxes and insights. The convoluted history of the retirement condition is fully explored, from its first being proposed as a cure for unemployment to becoming, in the final draft of the Beveridge report, a way to maintain labour force participation. In truth, as Macnicol's detailed account of the correspondence between Treasury mandarins Beveridge and John Maynard Keynes shows, it was never really more than a way of reducing the cost of the scheme. Similarly, despite Beveridge's trumpeting of the benefits of his scheme for pensioners, Macnicol shows that his report would have only barely increased the living standards of most pensioners. His discussion of the implicit, and sometimes explicit, ageism of decision-makers is particularly revealing.

Macnicol's strictly chronological approach means the book ends rather abruptly in 1948, and there is no discussion of the subsequent adoption of an earnings-related model for pension provision in the postwar years. As Leslie Hannah's research has explored, it is an interesting paradox that the centrepiece of "Old" Labour's pension proposals - the state earnings related pension scheme (Serps) - in effect replicated rather than reduced labour market inequalities. Moreover, New Labour's reversion to a flat-rate model for pension provision makes the more recent "politics of retirement" particularly interesting. Nevertheless, Macnicol's book should be required reading for those involved in the current pensions debate. More generally, anyone interested in the development of the welfare state in the UK will find this important and highly readable book an indispensable reference for many years to come.

Phil Agulnik is completing a PhD on pension reform at the London School of Economics.