Watching the Government tee up for a big push to get the economically inactive back into work feels a little like watching a man plot a hike across a minefield.
It isn’t that the concern is unreasonable: the number is high. And as we noted when we looked into the data, there are some 1.7 million such people who want a job. If the Government can tackle the barriers preventing those people from working, such as by clearing the NHS backlog, that is all to the good.
But the political terrain of such a campaign is fraught with danger nonetheless. First, because a lot of those people can’t work, and ministers will have to be careful to avoid either stigmatising them or inadvertently introducing inappropriate or cruel policies aimed at chivvying them back to the grindstone.
Second, and perhaps more seriously, because of one group of people which could work but chooses not to: those who have retired early. Trying to force this group back into work poses an ideological challenge for the Conservatives, as I noted back in January:
“But to focus exclusively on the economics misses a deeper point: that sometimes people simply do not wish to order their lives in a way that maximises their potential for HMRC. If you have earned enough to retire early and want to spend your twilight decades filing planning objections from a golf course somewhere, it is a strangely Stakhanovite instantiation of a small-government Conservative that refuses to let you.”
Yet the problem here is not simply the big-picture question of whether or not people should be able to live their lives, if they are able, in a manner that doesn’t best suit the Treasury.
There is also a more specific political issue: that many early retirees are in that position because of tax policies overseen by the Government. Consider the following hypothetical case of an average 58-year-old early retiree.
In 1993, they bought their house at the then-average age of 28. They paid the then-average price of £51,210 (and no stamp duty), and took out a then-average 25-year mortgage.
Over the life of any mortgage, the balance of one’s repayments gradually shift from paying mostly the interest on the loan to paying down the principal (this process is called amortisation). According to one expert I spoke to, a typical borrower will pay off almost 50 per cent of the total interest on a 25-year mortgage in the first seven years.
More good news for our Boomer: they enjoyed tax relief on mortgage interest during those crucial years; Mortgage Interest Relief At Source (MIRAS) was abolished by Gordon Brown in 2000.
Fast-forward to 2017. Our Mr or Ms Average has now paid off a house worth £223,257. Even if they’re earning just the average salary, £28,600, they enjoy disposable income in the region of £23,500. They have also diligently saved the average pension pot of £160,000.
Now for the clever part. Given low interest rates, he or she can use salary sacrifice to cut salary to the personal allowance (£12,500), and put £16,000 per year into pension for five years (and pay no income tax). To make up the income, they then take out against their home a £60,000 interest-only mortgage of two per cent, secured for five years.
The result? Roughly the same disposable income, about £23,300 (£12,500 + (£60,000 ÷ 5) – (£60,000 x 0.02)).
Fast-forward again to 2022. The pension pot is now £240,000, and house is worth £294,910 – and this is assuming no capital accumulation in the pension.
Mr or Ms Average can now take a 25 per cent tax-free lump sum out of their pension to pay back the mortgage.
The result? Their wealth has increased from £383,257 (£223,257 + £160,000) in 2017 to £534,910 (£294,910 + £240,000), an increase of £151,653, or 40 per cent, in just five years. All without incurring any tax at all. And given that these are the averages, the effects will likely be more pronounced the higher up the income scale we looked.
Given the usurious rents and marginal tax rates faced by younger workers, the big-picture injustice of this should be apparent. But in terms of the political problem for the Conservatives, it isn’t really the point.
The real danger is that well-to-do older voters who own their own home are the Tory base. Those who have managed to build up enough wealth that they feel they can retire early are perhaps one of the only groups who currently have grounds to think the economy is working for them.
More pertinently still, they played by the rules. The current Government might not be on the hook for MIRAS, and runaway house prices are something neither party has tackled. But that post-2017 wealth-management jujitsu was all carried out under the Conservatives, using perfectly legal means.
Voters might not mind a George Osborne-style retroactive raid on people who got rich playing by the rules when the target is a bank, or Jimmy Carr, or some other anonymous person much richer than them. But they will mind when it happens to them.
Besides which, what ingredients of the alchemy, if any, do ministers think were a mistake? Using tax relief to encourage people to save for their pension? Allowing people to unlock a measure of the wealth stored in their homes and put it to use?
It seems unlikely we’re going to get a coherent and comprehensive policy overhaul geared towards trapping people in the rat race as long as possible; that seems too obviously cartoon-villainous even for the Treasury.
But the alternative – trying to lure canny retirees back to work through measures such as exempting them from income tax – is also iniquitous in the face of the tax and economic situation faced by younger workers.
Surely if anyone should be paying the Social Care Levy, it’s those old enough to imminently need social care, and rich enough not to work?