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Only radical reform can fix our messed-up pensions system

(Alamy)

4 min read

Hardly a week goes by without new calls to cut state pensions. Whether it is dropping the triple lock, fiddling with uprating, raising the state pension age or taking away Winter Fuel Payments, the headlines keep coming.

Careful consideration of state spending on pensioners is needed, but this requires a cross-party, comprehensive review of all pension-related spending, including tax relief for private pensions, rather than ad-hoc tinkering.

Successful reform of this core element of the country’s social contract cannot fit a short-term political agenda. Misperceptions and misinformation about Britain’s pensioners abound. Most are not well-off and millions are just managing to afford the basics. Indeed, the UK state pension is among the developed world’s lowest. Countries far poorer than the UK manage to pay much higher pensions, so to suggest this meagre state pension is “unaffordable” is wrong. This is a political choice.

Dropping the triple lock or raising state pension age is not the answer

Our social welfare system is based on National Insurance contributions or credits from working-age adults to provide minimum pension income. Additionally, tax incentives, worth over £70bn a year gross, are paid mostly to younger people, to incentivise private pensions that supplement their later life income.

Protecting pensioners against rising costs and living standards is vital, but too often annual upratings have fallen short. By 2010, the basic state pension as a proportion of average earnings had sunk back to 1970s levels. The triple lock, promising increases by the highest out of either earnings, price inflation or 2.5 per cent, reversed the decline. But it has outlived its usefulness now and is not working equitably, especially after the 2016 new state pension reform. The triple lock provides best protection to the youngest pensioners and nothing to the poorest on pension credit, yet all political parties promised to keep it. Nevertheless, it was abandoned two years ago, leaving more pensioners in poverty, with no means of increasing their future income.

A bold set of radical reforms should replace the ad-hoc fiddling of past years. Short-term gimmicks like Christmas bonuses, Winter Fuel Payments or free travel have added complexity and cost, while major changes such as the new state pension have incorporated past complexities, such as the three different types of earnings-related state pensions and contracting out.

Just dropping the triple lock or raising state pension age is not the answer. In fact, until there is a comprehensive review, sustainable reform is unlikely to happen. The system is a mess, with some parts linked to prices, some parts triple-locked and some linked only to earnings. Meanwhile, state pension age increases have caused a significant rise in poverty among those not well enough to work longer, even those with over 50-year National Insurance records.

To control costs, rather than increasing the starting age, reforms must consider increasing the number of contribution years required for the full payment. Thirty-five years is nowhere near a full working life nowadays. Requiring, say, 45 or even 50 years, with people able to buy additional amounts, would reduce pension spending without needing to keep raising state pension age.

Other reforms for consideration include allowing early access for ill health, boosting pension credit take-up among the poorest pensioners, reviewing all the additional tax-free pensioner benefits and perhaps rolling elements like Winter Fuel Payments into a higher state pension, which is then taxable for those with higher incomes. It is also necessary to consider covering social care provision, perhaps with an additional tax levy for a national care service, and a national equity release scheme to recover some costs from people’s estate, or using private pension and ISA tax incentives to encourage provision for elderly care. Comprehensive reform of the various pensions tax reliefs is also needed to ensure the incentives are focussed efficiently.

All these measures would be part of a better future system of state pensioner support and would help address current concerns over inter-generational fairness, while still recognising intra-generational inequalities, retaining universal basic pensioner payments. What is required is a new Beveridge report to ensure a more settled pension policy framework fit for the 21st century’s aging population.

 

Baroness Altmann, Conservative peer and former pensions minister

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