Time for a rise

ONE proposal that will probably be welcomed at this month’s States meeting is social security contribution rates remaining unchanged.

ONE proposal that will probably be welcomed at this month’s States meeting is social security contribution rates remaining unchanged.

True, there’ll be an increase in the upper earnings limit, meaning those on very high incomes will pay more. But for the vast majority of us it’s steady as she goes.

The problem is, I’m not so sure that news is as good as it seems.

Read the report carefully and you’ll see that the government actuary has made it very clear that the current rates are too low to fund all the benefits in the long term.

At least another 0.5% is needed.

Actually, that finding is now some years old but so far nothing has been done about it – costing the scheme £6m. a year. Why?

Because Social Security are waiting for phase two of the zero-10 tax strategy to be completed before adjusting their rates.

In some ways that makes sense. Taxes and social security payments are viewed by many as part of the same package.

I earn X and the government takes Y, leaving me with Z.

Most people aren’t that fussed about drilling down into the various deductions from their wages to consider which bit goes to T&R and which bit goes to Social Security.

Some even suggest that the differences are so slight that the two systems should be merged. I disagree.

I fully support rationalising the income tax and social security administrations, with one set of civil servants looking after the collection of payments and the investment of funds.

I would also be happy to see one set of deputies responsible for the policy decisions for both schemes.

Maybe supplementary benefit could even be replaced with ‘negative income tax’.

But I would always keep a watertight bulkhead between general revenue and the insurance fund.

Why? Well, in Guernsey – unlike the UK – our insurance scheme is still just that, rather than simply another tax.

Some disagree and point to the ‘breach of the insurance principle’ when the States sets the upper earnings limit higher than needed to fund an individual’s own benefits.

That’s true, but every penny paid in social security remains within the fund to pay for contributory benefits – such as the old-age pension.

Better-off members of the scheme do cross-subsidise the less well off, but not a penny goes into the general revenue pot or towards funding non-contributory benefits such as supplementary benefit.

Once that principle is breached, our social security contributions become just a second income tax.

So, if the two are to remain separate does it really make sense for Social Security to constantly put off the inevitable increases in their contribution rates while waiting for the zero-10 project to be completed?

It’s been dragging on for years now, and, as any pension fund trustee will tell you, the longer you put off tackling a shortfall, the more dramatic the corrective action has to be.

What really worries me is that we may be facing a huge double whammy not too far down the road.

Frankly, I really doubt that at the end of the zero-10 project and the Financial Transformation Programme the States will show the necessary resolve to restrict spending in ways that avoid the need for tax increases.

Then it looks highly likely that Social Security will say, ‘Okay, now the tax project is complete we’ll have to increase our contribution rates, just as we’ve been flagging up for years.

‘Oh, and by the way, those increases now have to be bigger than they would otherwise have been, precisely because we’ve delayed them at the Policy Council’s request.’

If those two things happen together it will really take the wind out of the Guernsey economy’s sails by slashing people’s disposable income.

We’ve already seen that happen in Jersey with GST, but the compound effect of tax and social security rises could mean Guernsey is hit just as hard.

After all, even though the two systems are separate they both take money from wage packets, which have an identical impact on take-home pay.

Two sets of fingers simultaneously dipping deeper into the Guernsey person’s wallet/purse will really impact on living standards and spending.

My conclusion?

Much though it pains me to say so, I think that Social Security should act on their actuarial advice and increase contributions to a sustainable level now.

Not only does a stitch in time save nine, but that might make deputies think twice before considering any future hikes in taxation.