Tax them, don't axe them - pensioner benefit reforms should not be done on the hoof

by Dr. Ros Altmann

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Pensioners - Taxing is far better than axing

Consider changing the age of entitlement, rather than means-testing

Pensioner benefits becoming a political football. The furore over pensioner ‘benefits’ is hotting up. As the number of UK citizens reaching state pension age soars, the cost of paying National Insurance pensions was always bound to rise. There is a political backlash against pensioner payments, but it is important to consider this issue carefully. Rather than using pensions as a political football, it is important to assess the situation comprehensively.

Substantial pension cuts are already in the pipeline. The reality is that the bill for future state pensions has already been reduced significantly, by raising state pension age and reducing the generosity of the future state pension. As a result of the coming state pension reforms, millions of pensioners will end up with lower state pensions in future than under the current system.

Two elements are being conflated: It is very important not to address this issue in a knee-jerk fashion. Let’s think carefully about what is involved. There are two parts to this debate.

National Insurance pension triple lock on Basic State Pension only. Firstly, the national insurance state pension increases are under consideration. This is the element of our national insurance system which people have paid into all their lives – they have contributed to their future state pension and, even after a full working life, the value of the UK Basic State Pension at the moment is just £113-10 a week. This is the part that David Cameron has pledged to ‘triple lock’ by making sure that at least until 2020, the Basic State Pension will rise by the higher of inflation (measured by cpi consumer prices index), earnings or 2.5%.

No triple lock protection for SERPS/S2P. There are also additional elements of state pension, such as Graduated Pension, State Earnings Related Pension (SERPS) and State Second Pension (S2P) but all these are not part of the promise of the ‘triple lock’ and are only guaranteed to rise in line with cpi inflation.

Triple lock on Basic State Pension will still mean UK has one of lowest state pensions. The promise to continue to increase the pensioners’ £113-10 a week state pension by at least 2.5% a year is surely the very least that pensioners could expect – our Basic Pension remains one of the lowest in the developed world. Pensioner inflation rate is already far higher than for other age groups and many pensioners struggle to make ends meet unless they have private savings. Even those with savings have seen their income disappear as rates are so low. From 2016, a new flat rate state pension may start, but most pensioners will not be in the new system by 2020, so the Prime Minister’s pledge really affects older citizens, rather than those newly retiring.

So many bits of Pensioner ‘benefits’. Secondly, there are additional pensioner ‘benefits’ that are paid to all those above a certain age. These payments include free travel (bus or train passes for senior citizens), free TV licences from age 75, free prescriptions and medical tests, as well as Winter Fuel Payments of £200 a year (or £300 a year for the over 80s). The value of these benefits adds up to significant extra sums for many individuals, depending on whether or not they are used. I believe it is this area of state spending that needs to be carefully examined, but in a considered manner, rather than just using them as a political football.

They could be taxed to save money: These pensioner payments are, in general, tax free. That means they are worth far more to higher income pensioners. Significant sums could be saved by taxing these payments, which would be much better policy than trying to strip them from what are often called ‘better off’ pensioners.

Where would you draw the line as to who qualifies as a ‘well off’ pensioner?If it is only those on top rate tax, then very little money would be saved because only around 2% of pensioners actually pay higher rate tax. If we take benefits away from all pensioners and force them to claim means-testing, then those who have saved for their future will be penalised relative to those who did not or could not do so. This would be a powerful disincentive to save in future pensions.

Streamline the age at which benefits start. The age at which many of these benefits are paid could also be debated. The current system has different benefits starting at different ages and there seems little rhyme or reason to the decisions as to which benefits begin when. For example, free bus or train travel can start at age 60, while TV licences are received at age 75. Winter Fuel Payments start from state age at £200 a year, but then go up to £300 a year from age 80 – all of these tax free. Let us decide what the appropriate age should be for the benefits with a proper review of pensioner support and how it is paid.

Free travel only off-peak or starting at a later age would save significant amounts. Free travel from a later age, and perhaps only offering travel for free if it is off-peak, would save money, without taking the payments away from pensioners who see their bus passes as a lifeline that enables them to get out and about and keeps them fitter and more active. These benefits could also be taxable which would raise revenue without adding to means-testing burdens or increasing disincentives to save.

Means-testing would be a huge mistake: The whole thrust of state pension reform from 2016 has been designed to ensure a simpler pension system without mass means-testing. If the Winter Fuel and other payments were then means-tested instead, the whole agenda of reform that tries to encourage additional private pension saving would be undermined. As auto-enrolment spreads to all workers, the last thing we need is to bring back mass means-testing for millions of pensioners. This would send the message that only those who do not bother or cannot afford to save for retirement will receive the pensioner benefits later on, while those who do manage to set aside money for retirement will be penalised in the state pension system. This may be popular with those who want to take money from older people in order to cut public spending, but it would be a retrograde step for pensions policy in the longer term.

Let’s hope policymakers recognise the need for proper considered reform rather than pandering to populist rhetoric. Taxing is far better than axing benefits and streamlining them is much more sensible than stripping them away.

Dr. Ros Altmann
6 January 2014

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