The pyramids of Egypt were one of the seven wonders of the ancient world: the pyramids of state pension schemes are more modern, though no less impressive. Philip Coggan in the FT draws our attention to a new book, Ponzi's Scheme: The True Story of a Financial Legend, by Mitchell Zuckoff. A Ponzi scheme is the American name for a pyramid scheme.

Charles Ponzi invited people to invest in International Reply (postal) Coupons, promising fantastic rates of return. In reality there were no real returns, only money from later investors to redeem the promises made to earlier ones. Such schemes can only be sustained while there are enough willing dupes to provide the rewards promised to previous dupes. It is rather like a chain letter, benefiting only those high up the chain.

Coggan makes a point we have often made, that state pension schemes are modern pyramid schemes. There is no fund, no investments and no returns. Instead there are payouts funded from those currently paying in, and who do so because they are promised their own payouts in turn. These unfunded schemes are called 'pay-as-you-go' schemes because money paid into them today is paid out today to current pensioners.

They are fatally attractive to politicians because of a Public Choice Theory imbalance. The politician who enacts benefit increases earns the gratitude of today's pensioners (and voters), but the payment is made at the expense of future generations (who lack political clout today). In essence people who pay into such schemes today do so in the assurance that there will be more mugs coming along tomorrow to support them in their turn.

This is fine so long as nothing important changes. However, if people start to live longer, or if the birth rate declines, then the balance of young people paying taxes to older people consuming benefits changes adversely. In fact both are happening, bringing the real possibility that tomorrow's contributors will be either unable or unwilling to bear the burden which today's politicians have imposed upon them. Atlas might just shrug and refuse to carry the world; or he might emigrate.

Funded pension schemes provide investment which can raise productivity, making tomorrow's earners quite ready to pay dividends from their enhanced earning power. This is not true of unfunded state schemes. They promise, like Ponzi, more than they can perform. The difference is that the governments which perpetrate these pyramid schemes will probably not end up, like Charles Ponzi, behind bars.

The Department of Work and Pensions released a report (warning, large .pdf) last week which showed that our current system of benefits and taxation is quite clearly absurd, if not actually insane. Strong words, yes, but as Chris Dillow points out:

Here’s a question: Take a married couple with two children under 11 and pre-tax earnings of £200 a week. If they get a better job, raising their earnings to £300 a week, by how much does their net income rise? £60? £50? £40? Nope. £8.52. Yes. £8.52. That’s a marginal deduction rate of 91.5 per cent. The extra £100 this couple earns before taxes are swallowed up by higher income tax and National Insurance Contributions (£33); lower Working Tax Credits (£37) and less Housing Benefit (£19.50).

One of the two things you need to know about economics is that incentives matter (the other being that admonition about free lunches), it generally being assumed that it is marginal tax rates that influence people's working habits. For someone facing 91.5% such marginal rates why work the extra hours? Why invest in education or training? Why, in fact, do anything at all to try and better one's economic situation? It doesn’t appear rational to make the extra effort.

Yes, other groups and people in slightly different situations face lower rates but the highest disincentives, when combining the tax and benefit systems, are faced by the lowest paid, precisely those we actually want to encourage to work their way out of poverty and benefit dependency. Is lunacy too strong a description of this situation?

The problem comes from the fact that the levels of income where one receives benefits overlap with those where one enters the tax system. The imposition of the latter combined with the withdrawal of the former is what causes such extraordinarily high effective marginal tax rates.

The first step to a solution would be to raise the personal allowances significantly, as happens, entirely fortuitously of course, in the ASI’s flat tax proposal, to 12,000 pounds. The next step would be to do the same with the National Insurance thresholds so that our sample family would only be facing a 55% marginal rate. Still absurdly high, more, indeed, than many higher rate income tax payers, but at least not completely insane.

The Institute for Public Policy Research has caught the headlines by suggesting that the pension age in Britain should be raised from 65 to 67. That's great. We were saying the same back in the 1980s and 1990s. People are living longer and keeping in better health, so it seems natural that the pension age should reflect this. At the moment, the whole state pension system - supported by the taxpayer - is suffering under the strain of having to pay benefits to so many people for so long.

Perhaps now that such philosophically different think-tanks as IPPR and ASI are both saying we need to change the pension age, it might even happen. Certainly the ground is more fertile. When the Major government, in the 1995 Pensions Act, proposed raising the female pension age from 60 to 65 to match that of men, it expected huge public resistance - but in fact it was stunned by the lack of criticism. Indeed, they rather wished they had moved both to age 67, as we were proposing at the time and which was in common debate.

People seem to have accepted the fact that longer, healthier lives should mean a later retirement age. It is just that politicians have never been brave enough to suggest such a thing in public. Perhaps they will now.

Britain's government spending binge is not just inflating civil-service wages: public-sector pensions are rising too. Indeed, the cost of financing them has shot up from £340bn (yes, billion) to £460bn in the last two years.

At the same time, these public-sector pensions have come under a lot of criticism. Many of them are index-linked, with generous early retirement and sickness clauses. The official retirement age is just 60 when the rest of us are expected to slog on to 65. Independent experts say the true financing cost is nearer to £700bn than £460bn. And graduates in the civil service earn more than those in private business, so why should they get more generous and secure pensions too?

Alarmed by the cost, the government threatened (earlier this year) to slash the civil-servants' benefits, and make 5m public employees work to age 65. The mandarins held a one-day stoppage in protest. But hardly anyone noticed, and the government continued to talk tough.

Then suddenly now, the tough talk has evaporated. The government is watering down its plans. Staff in their 50s will still retire at 60, and even someone aged 20 would only have to work another two-and-a-half years to get the same pension. A big chunk of the planned savings will go into TUC backed schemes to bring part-time workers into the system. And an order forcing local-government staff to work to 65 has been revoked.

So what has changed to turn tough talk on making savings into an appeasement of the civil-service unions? Could it be the fact that the general election is now out of the way?

If you want to move people from welfare to work you have to push them. No amount of economic incentive will do it.

That was the startling conclusion of US welfare expert Lawrence Mead, Professor of Politics at New York University, at a roundtable organized by the London think-tank Civitas yesterday. Among academics, he has been the principal exponent of work requirements in welfare, the approach that now dominates national policy.

"People don't sit down and compute whether they would be better off in work," he said. "They go to work because their friends are working, because their families push them, or because it is demanded by the welfare system. Only then do they discover the Earned Income Tax Credit [a US in-work benefit intended as a work incentive], which comes as a complete surprise, a windfall to them."

That's particularly bad news for UK Chancellor Gordon Brown, whose Tax Credits system is already under attack for being unfathomably complicated and for overpaying millions of families and then saddling them with huge repayment bills.

The whole thing, suggests Mead's experience, is a waste of time and money. Rather, "the most powerful message the welfare system can send is self-reliance".

Say hello to Baby Bonds. This month sees their launch. All new children, including this gorgeously cute one, will receive £250 from the government to put in a child investment trust. Children of poorer families receive £500, while relatives and others can add (up to a limit) tax-sheltered funds to the trusts.

Ten years ago the Adam Smith Institute proposed giving £1,000 to each child in what we called The Fortune Account (download the pdf from here). We proposed it as a way to wean people off the welfare state. The funds we proposed would grow and be available for future educational, medical and pension needs. The expense of the scheme to taxpayers would be tiny compared to the future savings made possible as people acquired greater independence from the state. While the new Baby Bonds do not go that far, it will be easy for a future government to tweak them once people are used to the idea.

The Treasury is disappointed that so many people are choosing to invest their children’s bonds in cash, rather than stocks and shares. In the long term the stock market has outpaced cash by huge margins. However, for recent performance the Treasury should inspect its mirror. In 1997 they made a huge tax raid on pension and insurance funds. They have raised taxes and hit business profitability with costly regulations. The FTSE stands near its 1997 level, whereas stock prices in many other countries (including the US) have shown big increases. The public is wary of stock investments as a result.

Baby Bonds have thus made a modest start; but babies do have a habit of growing…

Britain's 800,000 local-government workers are threatening to strike over the government's plan to raise their pension age from 60 to 65. Welcome to the real world, guys.

Most UK public-sector workers have unfunded pensions - instead of lifetime contributions being invested in order to fund future benefits, the pensions are simply paid out of taxation as we go along. But at the rate things are going, say actuaries at Watson Wyatt, this scheme will be £690,000,000,000 in the red within a decade. That's twice the national debt.

But the unions have a case. They negotiated to get generous pensions at age 60 - indeed, many civil-service pensions are index-linked, which is fabulously generous (and expensive). And now the government is trying to renege (just as it has done with tax concessions on private pension funds).

But cutting the pension age isn't the answer. A better solution is simply to issue government debt to cover the pension liabilities and then invest the cash on the world's investment markets. The boost from those investments would soon reduce the burden.

Even better, securitize the debt. Promise a private consortium what we're paying in taxes now, and tell them to raise the investment needed. In other words, take the government out of it and privatize public sector pensions. Then workers get the extra benefit of those investments, the government does not need to pay so much to maintain the same level of benefits, and the capital is all managed much better because it's being managed by professional private-sector investors. Simple!

It is predictable that those who like big government have scorned President Bush's plan to privatize part of social security - or state pensions as we call it in Britain. But it's disappointing that they've lied about it too.

They say that pension privatization in Britain was a failure, pension funds have cheated their customers, plans have gone bust, and privatization has condemned the Brits to retire in poverty.

Ignorant drivel. Britain still has a state pension system. It was supposed to see you alright in old age. But politicians proved very good at raising the taxes, very bad at raising the pay-outs. So the state pension now leaves you in poverty. If you relied on it, you have to go on welfare.

So people didn't rely on it. Companies set up pension plans for their employees. Individuals saved for themselves in tax-assisted personal plans. That way, you keep what you save, and don't have to rely on the promises of future politicians. It was a huge success: in 1996 Brits had investments of nearly £1 trillion in their private pensions - more than the rest of Europe put together.

But now company plans are closing and fewer people are saving. Why? Because in 1997 the New Labour Chancellor, Gordon Brown, figured (correctly) that most people don't understand investments and he could sneak a new £5-billion a year tax on the pension funds without anyone noticing. So now those same funds are facing shortfalls - of almost exactly the £35 billion he has lifted from them so far. And bookloads of new regulation have raised their costs even more. Meanwhile, Brown's raising of welfare pay-outs has made more people figure there's no point in saving anyway. Any wonder that people aren't saving, and firms are closing their retirement plans to new workers?

Britain's pension system was a success. The state system was a swindle, but people had private or company pensions instead. Because they could be invested anywhere in the world, they gave savers much higher returns for their money than the state ever could.

Then the politicians interfered and... the rest you know.

As Britain gets richer, you would expect it is getting healthier too. But remarkably, some 2,400,000 people now claim Incapacity Benefit - the state hand-out of up to £74 a week that goes to people judged too ill to work.

Indeed, it is so remarkable that nobody doubts that many people are claiming and receiving the benefit fraudulently. The numbers first escalated in the 1980s, particularly in mining and steel towns that were hit severely by the industrial restructuring of the time: there were no jobs locally, and when people's unemployment benefit ran out, doctors just signed them 'on the sick' so they qualified for permanent benefits.

Also, nearly half those claiming Incapacity Benefit claim to be suffering from 'stress', while a fifth say they have back pain. The interesting thing about both those conditions is that they are very hard to gainsay through medical tests. Which also raises suspicions that many claims are fraudulent.

But you have to be brave to give up a nice little earner of £74 a week and go out and get a job, which is why the government wants to change the system and provide higher benefits for people who are actively seeking work. Good luck to them. This government's record on welfare reform has been appalling. There is always big talk about exposing the cheats, getting people back to work and so on. But not much actually happens. The only minister to think radically on the subject, Frank Field MP, was unceremoniously dumped after just a year. And this week, we've had more big talk about reforming Incapacity Benefit - but don't expect to see the figures plummeting any time soon. So we will continue to get richer and healthier, while still more of us are drawing this discredited hand-out.

We are really only going to make an impact on the welfare rolls when we integrate the tax and benefit system so that people are always better off taking some work rather than none. And so that benefit recipients who do take work are not stung by effective tax rates of 70%+ as their benefits are withdrawn. Is that really so unthinkable?

Neil Collins, City editor of London's Daily Telegraph, wishes all his readers a happy new year. At least, it would be if we did not have to slog until the end of May simply in order to feed the demands of the Treasury for tax revenues. Drawing on the Adam Smith Institute's annual Tax Freedom Day calculation, he calls for low, simple taxation. Time for the Flat Tax, perhaps?

Just as heartbreaking as the size and complexity of our taxes - Inheritance tax, for example, needs 900 pages to explain the joys of Potentially Exempt Transfers, Gifts With Reservation, Interest in Possession Trusts and much more - is how the money is (mis)spent. Says Collins:

It's strange but true that raising disability benefits makes more people ill. It's not usually put quite like that, of course, but it's a fact that the more people get paid for being sick, the more they will feel sick enough to claim incapacity benefit.

Perhaps this is why employees at the ironically named Department for Work and Pensions seem to have so many more days off work than the rest of us: when you're responsible for ministering (financially) to the sick, you often feel too unwell to go on.

It is often said by proponents of a welfare state that if it did not exist then there would be no system to help the needy, the handicapped and the destitute. Despite James Bartholomew showing us in his book The Welfare State We're In that before the welfare state there was a system to protect such people, many remain dubious.

Equally it is argued that when natural disasters occur we need Governments to provide the vast sums of money required to provide aid to entire regions. The recent Tsunami shows that this is not necessarily so. Having originally pledged £15 million the British Government then raised its contribution to £50 million after the British public raised over £20 million. This turn of events, where aid comes from individuals and not government, has occurred again as the British public's giving has increased to £72 million and continues to rise.

Unlike Government aid which often comes with strings attached, private giving can take whatever form the donor desires, either to a charity in the disaster area which can use the cash in situ, or to an international charity which can purchase things which the country may not have and fly them out there.

James Bartholomew could be right. Perhaps if the welfare system were run by a similar system then equivalent advantages might occur.

Because the UK government allows people to pay a limited amount of their earnings tax-free into a pension fund, it feels it has to control the subsequent use of it. One condition has been that people have been required to spend at least 75% of their fund on buying annuities before they reach the age of 75.

Annuities give a lifetime income in exchange for cash, and the government's intent is to stop people spending all their pension savings and then becoming dependent on the state. However, annuities convey entitlements in exchange for property. When you die there is no fund left to pass on.

Furthermore, the value of annuities varies at the time of purchase, and can give poor returns to someone forced by law to buy at an inopportune time. Government even affects their value by its borrowing. By issuing many bonds, they lower their value. There has been unrest in the UK at the injustice of the law, and at the poor values which it forces people to accept. Many would prefer to draw down their savings at a rate which will see them through, and to pass on any unused part when they die.

Yesterday the House of Lords voted to delete the annuity requirement of 75% by 75. Under UK procedure, this does not necessarily become law, as the government may use its House of Commons majority to restore the requirement. But it does sound the death knell for an unjust and out-dated law.

In the near future people will be able to save what they want, and because there will be no tax concessions, there will be no state limits on it, or state control of the savings. And because tax has already been paid, any future growth will be tax-free, as will any income drawn from the fund. That day was brought a little nearer by yesterday's vote in the House of Lords.

I hope other bloggers will ping this, because James Bartholomew has just produced an excellent hard-hitting book called The Welfare State We're In. I went to the launch party yesterday at the United Westminster Almshouses - one of a number of buildings in Westminster created for welfare purposes, but before the inception of the Welfare State.

Bartholomew starts the book with a quiz: How many children had 5-7 years' education before state schooling came in? (95%) How many adults today are functionally illiterate? (25%) How many of London's famous teaching hospitals were created by the NHS? (None) How many cancer patients die each year because NHS treatment is inferior to other EU countries? (10,000).

He argues that social security has produced alienation and crime, unemployment, and more poverty; that means-testing has discouraged work and saving; that the high taxes required have made work less attractive. That the NHS is 'like a train crash every day'. That old people would be better off if the state pension had never been created. That the UK could have been a rich country, but the postwar welfare state killed any chance of it.

I'm not the only one who likes this splendidly robust and commonsense assault on political correctness. Nobel economist Milton Friedman says: "A splendid book... A page-turner, yet also extensively sourced. Demonstrates how attempts to achieve good intentions have led to horrible results... I congratulate Mr Bartholomew on how thoroughly he has marshalled the evidence and how effectively he has presented it."

A new report says the Brits aren't saving enough for their pensions. Commentators have asked Tony Blair when he's going to put taxes up to pay for higher state retirement benefits, but he just grins. Not until after the election, anyway.

Britain's certainly in a much better position than much of Europe. According to Jeremy Clarkson - the motoring guru seems to be becoming an economic pundit too - in the Sunday Times:

Thanks to changes made by Margaret Thatcher in 1979 we’re going to fall short of the pensions bill by only 5%. In France they’ll miss it by 105%. In Germany it’ll be 110%. Then there’s the United States.

It's bad enough, though. But don't blame yourself, says, the ASI's own Dr Eamonn Butler, writing in The Business. Blame politicians. After all, they've 1) staged a £5b-a-year tax raid on pension funds, 2) systematically cheated on state pensions, 3) made it irrational to save because of means-testing, 4) made pensions too complicated, 5) not been brave enough to admit we have to work longer if we're going to be retired longer, 6) scrapped perfectly good savings schemes invented by their opponents, 7) mired pension planning in regulation. And 8) they've voted themselves and their officials cosy index-linked pensions, so couldn't much care.

So forget about higher taxes. The government should replace the state pyramid-selling pension with funded personal accounts like Chile did [PDF], admit we have to work longer (but we're fitter and living much longer anyway), and cut away the regulatory crap. Then it can just retire and put
its feet up.

For those of you who don't read the sports pages, there has recently been a row about David Beckham, the England football captain. In his latest match for England he deliberately fouled someone.

Why? Not because his team would gain any advantage.

He had sustained an injury to his ribs, so he knew he would be unable to play in the next England game. By fouling someone in the way he did, he knew he would get a yellow card. This would be added to the yellow card he had previously received in another match and the two together would cause him automatically to be banned from his next game. But that was fine, because he knew he could not play in the next game anyway. By getting himself banned for one game, he would wipe away the yellow card already on his record. He would then be able to play in the rest of the tournament with less risk of getting banned for a game.

David Beckham was being, as he put it, "clever". Of course Beckham is well known, despite his footballing talent, for not being an outstanding intellectual. But he is obviously bright enough to work the system (if not quite bright enough not to brag about it).

When soccer's governing body drew up the rules on fouls, did it intend to incentivise the England captain deliberately to foul someone?

No, of course not. The people involved surely thought they were creating rules which were fair. They probably felt they were writing rules which were the footballing equivalent of 'social justice' - a fair amount of punishment for a particular amount of crime. They assumed that behaviour on the football pitch was a given and that the rules should merely reward and punish in a "fair" way. They did not think that changing the rules would change behaviour. But, as Beckham has shown, the rules certainly did change behaviour.

This very same mistake is at the core of the failure of the welfare state. People - including all the famous politicians and many clever civil servants - have thought they could change the rules - even whole structures - without changing behaviour.

In 1948, Bevan nationalised the hospitals. He assumed that the standard of hospitals was a given. He assumed that the behaviour of doctors, nurses and administrators was fixed. They would not be affected by a change in the structure - in the rules of the game under which all those people were operating. They would perform just as efficiently, just as charitably.

Their time would be deployed without any change in the amount of time spent in bureaucratic work. The hospitals would be just as clean. The authority of the consultants would be just as great. Innovation would be just as notable as before. There would be just as many beds and just as many small, local hospitals. All would be just as good, regardless of a wholeseale change in the rules of play which resulted from changing from an independent, part commercial, part charitable structure to a state-owned structure.

They were wrong. In this case, as in many, many others, the creators of the welfare state fell foul of the Beckham rule. It can be defined thus:

If you change the rules, players will change their behavour.

Adair Turner, head of the government's advisory Pensions Commission which will issue a report this week, says that there is a £57 billion hole in Britain's retirement savings. What can government do about it?

Butting out of the pensions sector would be a good start. Government gives tax relief on pensions savings: but nobody understands it; it's hugely complicated (the amount depends on your age, sex, and employment status); that throws up innumerable anomolies; those in turn require constant changes in the rules; but since you can't tear up people's long-term saving contracts, you end up adding new rules to an already over-complicated regime.

Gordon Brown hasn't helped, by seeing pension funds as a nice little Treasury earner and socking them with nearly £6 billion a year extra tax - about the size of Turner's black hole. And by making means-tested benefits higher for pensioners, he has made it crazy for most people to save - they lose a pound of benefit for every pound they have in their private pension plan.

Could we fill the hole by making pension saving compulsory? Tony Blair and Downing Street think that will simply be seen as a new Labour tax. They're right. And the Australian experience shows that if people are compelled to have pension savings, they simply save that much less elsewhere.

No. Only two things will solve the pensions crisis. First, if government must help people save for retirement, make it easy. Give people £1 or 50p for every pound they save themselves. Or scrap front-end inducements altogether and scrap tax on pensioners' savings incomes. And tell them they don't have to put all their savings into an annuity, as they do today - just so long as they have enough to keep them off social benefits.

Second, recognize that people are fitter and living longer, and doing nicer jobs that they don't want to retire from. Britain's favourite weatherman, Michael Fish, has been forced to retire at 60 simply because he is a civil servant. Why? It's no wonder that the UN calculates that by 2050, we will have only two people in work for every retired person they have to support. The state pension age is 65, the state pension system is bust, and state pensions aren't big enough to live on. In the long term the best thing might be to privatize it like Chile and other countries have done. But if you are going to keep it, raise the retirement age to a realistic 70. That means you can pay a state pension higher than the means-tested benefits level, so people won't lose out by saving privately.

In 1997 Britain's pensions were in good shape. Unlike other EU nations whose pensions depended on extravagant promises drawn upon future taxpayers, British pensions were mostly funded. Our pension funds, invested and growing for their future recipients, were larger than those of all other EU nations added together. A diminishing proportion of those nearing retirement depended on the basic state pension; most others had an occupational or personal pension, or savings which included the popular personal equity plans (PEPs) and Tex exempt special savings accounts (TESSAs).

All of this has changed in seven years. In his first budget Gordon Brown taxed pension funds an extra £5bn a year. He sought admiration for the first of his 'stealth' taxes, but it meant that he took money from pensioners to spend on his priorities instead of allowing those who had saved it to spend it on their own. It was the first of many ways in which he made saving less attractive. He abolished the popular PEPs and TESSAs and introduced the over-regulated, unattractive, and unsuccessful Individual Savings Accounts (ISAs) in their place.

He made means-testing the basis of state retirement payments, so that those who had secured assets and income for their retirement were penalized, while spendthrifts were rewarded. The three-year trough in equity prices was made worse in Britain by a series of measures which hit business profits and therefore stock prices. Additional regulations and taxes combined to depress UK shares, and with them the value of pension funds.

There is now a shortfall between pension assets and liabilities. In the private sector this might be redressed by years of growth, careful asset management, and an easing of depredation by government. In the public sector, still characterized by unfunded promises unrelated to savings, the gap is immense. If properly accounted, it would raise the ratio of government debt from 33% of GDP to 85%.

Instead of funds for their retirement, people have paid for extra bureaucrats and government spending increases which have been largely dissipated in increased public sector inflation - not a good trade. Now we probably have to abolish means testing, and raise the basic state pension and the retirement age. Ultimately saving has to be made more attractive by protecting it from government. But after seven years of government folly, a skeptical public may take some convincing.

Britain's Conservatives have just published a very smart little book called Towards a Lifetime of Saving. The idea is to give people a personal lifetime account, with a bit of government money thrown in to encourage people to add to it when they can. You can use it to save up for your retirement (and you keep everything you save - no means-testing it away like today's pension savings. But you can also dip into it through your lifetime, for things like illness, buying a house, or paying college fees.

It's a good idea. Well, I would say that, because it's remarkably similar to an idea that the Adam Smith Institute developed nine years ago, called the Fortune Account.

Indeed, it's been a good two weeks for ASI policies. Both Labour and Conservatives have adopted the choice agenda for health and education that we worked up 22 years ago. The government has endorsed another proposal we have been pushing for decades, using road user charges to replace fuel duty and car tax. The CBI revived our idea of upping the state pension (and the pension age) to overcome today's perverse incentives against saving.

Now, if only we could get politicians to adopt our proposals for slashing tax and regulation, we'd be in good shape!

The excellent James Bartholomew makes a point in the Sunday Telegraph newspaper that I've been making for a decade now - that if our state pension system were subject to the same rules we impose on private plans, a generation of cabinet ministers would now be bankrupted and in the slammer for fraud.

Indeed, Bartholomew reckons we've been defrauded to the tune of about £5,813 billion. Nearly six trillion quid, if you like.

We've been whipped into a frenzy against private insuers for 'mis-selling' pensions, and against private enterprises which collapse under the weight of keeping their pension schemes solvent. But we hear nothing about the fact that state pensions have been 'mis-sold' for years - we've been forced to accept a contract in which we pay taxes for a pension, but where the other side (the government) just change the rules when they feel short of cash. And you never hear anything said against the stupidity of politicians who have made the regulations on private company pensions now so onerous and costly that, not surprisingly, firms are finding them impossible to maintain. Nor the fact that since 1997 the Chancellor has been taking about £6bn a year out of pension funds by way of 'stealth' taxes.

I say bankruptcy and the slammer are too good for them.

In a free society pensions would be voluntary. People would decide their level of contribution and would live with the consequences. Charities might care for those who made inadequate provision, or were unlucky with their fund.

Problems arise when state provision offers a safety net, for there will be those who use it as an excuse for profligacy. Some of those who have been prudent and have saved will be upset that the state rewards the spendthrifts who would otherwise be destitute. Yet few modern societies would be prepared to let some of their elderly citizens starve.

One approach is to require people to contribute to their own pension funds, and a minimum 12-14 percent of salary has been suggested. Choosing between competing providers, they would see their fund gradually accumulate, making them independent of the state in retirement. Indeed, if growth kept up its long-term trend, they would be quite wealthy.

The scheme uses compulsion, just as car insurance does, and allows people to choose a fund appropriate to their needs and tastes. Proponents point out that this is not surplus compulsion, in that the state scheme supported by taxes and national insurance is in no sense voluntary. The new plan allows them the choice between private alternatives to the state. A similar approach has been used in Chile.

Given the complete mess which decades of state interference have wrought upon the UK pensions industry, the day of a simple, all-embracing plan for personal provision might be drawing near.

Governments have tried many schemes to raise the living standards of the poor. Milton Friedman said they are like throwing dollars at a barn door in the hope that a few will go through the knot-holes. Indeed, if the welfare budget were simply divided up between the poor, they would all be rich.

The best welfare scheme ever devised is called a paying job. No government scheme has ever approached it. It brings not only income, but self-respect and a life outside. A single parent who stays home on welfare is a poor role model. Children might grow into 'inherited dependency.' A self-supporting parent who makes sacrifices for children is more likely to raise good citizens and achievers. A parent might prefer to stay at home, but cannot really expect others to pay for that preference. Taypayers might willingly pay to provide affordable child care, however.

Instead of raising taxes to pay for more welfare, government should be lowering them to create more jobs. A dramatic cut in the top rate would paradoxically help the poor more than the rich. The flood of new jobs it would create would do more for them than any welfare programme yet has.