Stop tinkering and take action on pensions crisis
by Dr. Ros Altmann
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ANOTHER week – and another report highlighting the need for a new approach to pensions.
This latest report calls for the State to pay a decent, fair, but minimum pension, just above the current pension credit level, getting rid of the complexity of the existing system and introducing a fair pension which leaves people free to provide more for themselves when they can without any means testing penalties.
I have been calling for this for years. Finally, a momentum is building that recognises the need for such change.
Put simply, we must radically reform the State Pension. The Pensions Commission ducked this issue, in favour of piecemeal tinkering with our current complex system. Lord Turner has already admitted he wishes he had gone further and was not bold enough. That is certainly true. The time for tinkering is long gone.
We need radical action. And we could achieve it. We can pay a decent pension to all elderly citizens. With political will, the opportunity is there for a visionary leader to announce to the electorate that we can pay a decent state pension to all our older citizens and can end the mass means-testing which is so costly to administer and which leaves millions still in poverty when they are too proud to claim.
Gordon Brown pledged to end means-testing and then expanded it dramatically! It was Brown who has consistently insisted that means-testing and complex credits are the answer to all our welfare problems. He refused to end mass means-testing of pensioners, despite his pledge to the 1993 Labour Party conference where he said: “I want the next Labour Government to achieve what in 50 years of the welfare state has never been achieved – the end of the means test for our elderly people.”
Yet, when he came to power, Brown extended means testing dramatically by introducing Pension Credit, so that now nearly half of all pensioners are reliant on pension credit to lift them out of poverty.
We may need to start at age 70 or 75to make it affordable, but that is so much better than what we have now. The current system leaves millions of pensioners in poverty – most especially the older ones – and even after all the complex reforms of the state pension that we are currently embarking on, there will still be nearly half of pensioners needing means testing by 2050.
Pension Credits undermine private pension savings. Our state pension is just about the lowest in the developed world. After a full lifetime of contributions – now 30 years – the full basic state pension is just £97 a week. Even with an additional state pension, millions of pensioners do not reach any adequate minimum income. Because the state pension is so inadequate, Labour introduced the Pension Credit, a means tested top-up to the state pension which can bring pensioner incomes up to at least £130 a week.
Yet anyone over 60 can still get £130 a week, even if they have never paid National Insurance, as long as they don’t have much private pension or other income! Asonly those people who have not got good private pensions, have not got much savings and do not keep on working will be eligible for this extra £33 a week, the Government is creating a significant disincentive to people, especially lower earners, to bother contributing to pensions at all.
The inadequacy of the state pension and reliance on means testing has serious consequences for pensions, pensioners and society.
Apart from the disincentives for private pensions, mass means-testing leaves nearly two million pensioners in poverty. Because pensioners are either unaware or too proud to claim, they do not get the benefit. Why are we making older people jump through hoops to get this money?
In addition, the costs of administering the pension credit and the added complexity to our already horrendously complex pension system, costs significant amounts of taxpayers’ money that would be better spent elsewhere.
Labour could have adopted radical reform, but chose not to. When I was advising the Government from 2000 to 2005, I tried to get them to adopt the kind of radical reform that would finally deliver a fair pension for all. If it has to be paid from a later age to contain the costs, then so be it, but at least there should be some point beyond which pensioners get a decent pension as of right, without having to claim or having to live in penury because they are too proud to do so.
One thing is certain; we cannot go on like this! Instead of radically reforming our state pension, we have left in place the ludicrous complexity and, in fact, made the whole pension environment even more complex than before.
In fact, the Government’s new national pension scheme is not suitable for lower and moderate earners unless we reform the state pension.
The only sustainable solution is to pay a decent fair state pension to all, as of right, without means testing. If we continue to insist on means testing, we will undermine incentives to keep saving or to keep working longer, because the lowest income pensioners will be penalised.