At the same time as the government is planning to focus working-age benefits on means-tested benefits – a “Universal Credit” – it is also making proposals to remove means-testing for pensioners. The principle of a universal pension was pioneered in the Citizen’s Pension of New Zeland, and that, more or less, is likely to be the model for future development. There are strong arguments for such a scheme: it will be simpler to manage, take-up will be better, and it avoids the perverse incentives associated with means-testing. It should go a long way towards avoiding poverty in old age, without penalising people for saving or having made alternative arrangements.
However, the government is suggesting that the new pension will not affect the position of existing pensioners; it will only apply to new claimants. The State Pensions scheme is not based on a fund: current contributions go to pay current benefits. The claim of those who are working to have decent pensions in the future depends on what they do for pensioners now. The arrangement the government is proposing suggests that pensions will be better when their generation retires, at the expense of those who are then working, but that they are not ready to protect the position of current pensioners. This is indefensible.
The government could just abolish National Insurance pensions instead. However, removing entitlements that people have paid for will raise a storm of protest from those who feel their contributions have gone for nought. (The same problem blights the transitional arrangements: when the scheme is introduced, the new claimants will also have paid contributions.) There is a way round the problem: start introducing the scheme, not for younger pensioners, but for older ones. If the scheme opens with a universal pension for everyone over 90, the problems with equity largely vanish. During the transition, younger pensioners can be told their benefits are time-limited, which is consistent with the principle of insurance. And the qualifying age can gradually be reduced to the level the government wants to support, avoiding the vexed problems of raising pension age.