The contributory principle

In following the debate on pension reform in the UK I’ve heard a lot of people talk about the contributory principle: that what you get from the welfare state should reflect your contribution. Often it’s phrased in terms of the taxes paid throughout one’s lifetime so you hear pensioners complain that they’ve paid taxes all their lives yet now get little in return, while the jobless are paid for doing nothing. Leaving aside the accuracy of those claims, it is curious to me that people think a contributory principle should hold at all!

If one thinks that the services you enjoy should be commensurate with your income—which is highly correlated with your tax liability—then why would you think that the state should do anything other than uphold property rights and resolve some market failures? In that world view there seems to be little reason to support the state taxing you, with all the accompanying deadweight cost, and then in return providing you with services that represent equal value. Far easier to simply leave it to the market, which has the added advantage of preserving peoples’ right to choose their own spending patterns.

Much of the function of the state in providing safety nets and services is not to overcome market failure, but to equitably redistribute wealth. That holds for cornerstones of the public sector, such as health and education, just as much as it does for explicit transfer payments. Inherent in the idea of redistribution is that you do not get back what you put in. If you are wealthy you get back far less, and if you are poor then you get back much more.

Complaining about one’s return on taxes seems to be to be a cover for one of two things: either it’s really a discussion about the scope and size of the welfare state, or it’s a complaint about expectations being unfulfilled. The former is an important debate to have, but it should eb seen for what it is. The latter occurs when the implicit social contract changes and those who acted in reliance on it see their wealth decline as a consequence. That is exactly what is happening with the current debate over pension provisions.

When the social contract is unilaterally changed by the state there are bound to be those who suffer as a consequence. The costs of transition make a good case for some form of temporary relief for those who are affected and unable to make other provisions for themselves. Perhaps the real problem here isn’t that the contributory principle is being abandoned, but that not enough heed is paid to those transition costs and the pensioners whose lives are changed by them.