PENSIONS POLICY

RESTORE THE LINK

by Lynne Jones
November 2000

The pre-budget report has seen the announcement of welcome increases above inflation in the basic state pension for the next two years but the gap between the universal benefit and the means-tested minimum income guarantee for single pensioners will widen. As the Association of British Insurers pointed out in its submission to the Chancellor, better pensions for the whole population means ensuring that private and state pensions mesh together. Raising the minimum income guarantee reduces the incentive for lower earners to save for retirement if it results in a smaller top-up to their basic state pension. It also creates considerable resentment amongst pensioners who have saved for their retirement and see themselves no better off than had they relied entirely on the State.

To try and get round this problem, the Government is proposing a pensioners’ credit. This is being promoted as a cash ‘reward’ for modest savers. The reality is that, in future, instead of being penalised pound for pound, as at present, the withdrawal rate will be 40p in the pound, the same rate as paid by the highest taxpayers. It would be fairer and far less bureaucratic to set the state pension at the same level as the minimum income guarantee (MIG) and to ensure that the ‘richer’ pensioners have some of their gains clawed back through the tax system.

A MORI poll published at the end of September found that 93% of people think the state pension is too low and 73% think it should be more than 100 a week, the amount proposed for the minimum income guarantee by 2003. This is about what the basic pension would have been had the link with earnings not been broken. Interestingly, 62% of those questioned said they would be willing to pay more in tax or National Insurance to fund an increase in the state pension. The DSS’s own research also suggests that the public would be prepared to pay something towards an increase in the basic state pension. When people were given the figures of the cost in terms of National Insurance contributions, they were certainly willing to fund to a level which would add another 10 to the single pension and probably to add another 20-30, provided young people were assured that the system would continue so they could benefit.

The Government argues that by concentrating additional resources on means tested benefits they are helping the poorest pensioners. There are two main problems with this approach. First the poorest pensioners are, in fact, those who are entitled to but don’t claim the MIG. The latest take-up campaign seems to be having little impact in denting their numbers. Second, by concentrating money on means-tested benefits, the Government may be alleviating present day poverty but it is not creating a system that would prevent it.

With the rise in the MIG to 92.15 next year and the decision to spend 3.8 billion on tax-free Winter Fuel Payments that go to even the richest pensioners, an immediate equalisation of the universal and the means-tested benefits is not now affordable. However, it would be possible to raise substantially the level of the state pension for the oldest pensioners, who are least likely to apply for income support. They also happen to be the poorest pensioners and will remain so as long as second tier pensions are index-linked to prices and capital assets get consumed.

Another way of reducing the cost would be to pay a state pension supplement to single pensioner households. Double the amount of a lower unsupplemented single pension would still put pensioner couples above the MIG.

With the recognition from all sides of the debate that more of our national income must be devoted to pensions, we have a choice of pension futures. If the basic state pension continues to erode in value relative to the MIG, as is the Government’s intention once the pensioner credit is introduced, the future will be one of ever-increasing reliance on means-tested benefits. Alternatively, a commitment to a universal benefit set at the income support level will reduce the intrusive bureaucracy that pensioners hate so much and provide the incentives to save. There will be a clear message that it is worthwhile contributing to second tier pensions. This will only occur if the pensions-earnings link is restored. According to the Government actuary, this will require a 0.2% per annum increase in NI contributions which is perfectly affordable in the context of the rising incomes that will, as a matter of course accompany the increased cost. The campaign to restore the link will, and must, continue!