Why pay pensioner benefits to well off pensioners?
by Dr. Ros Altmann
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There is much talk at the moment about taking benefits away from better-off pensioners, and forcing millions of older people to claim winter fuel payments, free bus passes, prescriptions or eye tests. The Prime Minister has promised this will not happen before 2015 and he is right to refuse to bow to pressure on this issue without proper analysis and debate. Of course it is tempting – in cash-strapped times – to look to save money wherever we can and taking benefits away from better off pensioners is potentially attractive, especially when so many younger people are facing benefit cuts and high levels of unemployment. But it is important to consider carefully before cutting.
Why do we have this whole array of pensioner benefits anyway? Well, the main reason is that our state pension is so low. Successive Governments over the past few decades cut state pensions, leaving pensioners way behind the rising living standards and earnings of much of the population. Many pensioners who could not work, were living on fixed incomes and whose savings had been hit by high inflation over the years remained very poor. They (company pensions only had to be inflation-linked after 1997) and. So politicians kept adding some extra benefits for pensioners, often as political ‘gimmicks’ to buy votes, and helped to offset the inadequacy of state pensions. These benefits are a lifeline for many pensioners too. Millions of older people rely on these payments, protecting some of the most vulnerable in our society.
Over the years, we have added free eye tests, free travel, a Christmas bonus, winter fuel payments, cold weather payments, free prescriptions, and free TV licences, which have, of course, been politically popular with pensioners. But they cost substantial sums and it is right to debate the merits of this spending. Why are we paying money to well-off pensioners who clearly do not need it? At the moment, most pensioner benefits are paid to all pensioners, just like the state national insurance pension. If you have built up your national insurance record, you are entitled to the money and the qualification criteria is age, not income. There are other benefits that have to be claimed and are only available to the poorest pensioners, such as Pension Credit, and, in fact, nearly half of pensioners are actually entitled to claim means-tested benefits already, but the Government is currently trying to reduce the prevalence of means-testing for pensioners in order to reduce complexity and overcome the disincentives to saving that means-testing entails. Means testing is a major disincentive to saving and punishes those who saved just enough to disqualify them from claiming the benefits. These people will see their neighbours, who did not save, receiving far more from the state and younger people will learn that saving can damage their later life income!
If we introduce means-testing, then people will have to claim each benefit, it will be very costly to administer, very complex for those entitled and will mean many do not claim. Older people are notoriously the worst at claiming benefits, because they find the process demeaning and difficult, so they do without. By paying money to every pensioner, we will be sure that all those in need will be paid, but it inevitably also means some who do not need the money will receive help too. I think that is a price we have to pay for ensuring that we don’t leave older people without money for heating in the winter. Means-testing is complex, costly to administer and very inefficient. It sounds great in theory to only pay money to those who are least well off, but in practice, the problems are that it is not always easy to identify those who qualify, the system is prone to errors and it is pretty unfair for those just above the cut-off who end up not getting the money because they saved a bit more than someone else and are considered not ‘worthy’.
Of course, if we were designing a sensible pension system from scratch, we would not introduce so many different small payments, but we are stuck with the existing system and I believe such universal benefits are vital, in order to ensure that all those who need the money do get it. We know, from our Saga surveys, that millions of pensioners really value and rely on these free benefits to heat their homes, get out and about or look after themselves. Therefore, I would caution against means-testing all these pensioner payments. There are very strong arguments in favour of universality.
So what might be considered instead, if we want to save some money? I think there are three ideas worth looking at. Firstly, if the State Pension itself were not so low, there would be far less need for extra benefits. The Government is considering introducing a higher state pension, without the need for mass means-testing, so it might make sense to roll the value of all these extra pensioner benefits into a higher payment and end the complexity and inefficiency while also ensuring that pensioners do not lose out so badly. Secondly, and allied to this, there is a case for considering making all these benefits taxable, whereas many of them are currently paid tax-free. These tax free payments are obviously worth far more to a top rate taxpayer than others, which does not necessarily seem sensible. Finally, one could consider restricting payments in some way, perhaps only starting to pay from 75 instead of from age 60 or only allowing off-peak travel for free. Overall, however, these benefits are very much valued by millions of pensioners and we must not succumb to calls to take them away without carefully considering whether the practical problems of trying to impose restrictions could cause too much collateral damage.