The government intends to cut Child Benefit by suspending payments to families where one person falls into the higher tax bracket. There are two main objections to that proposal. One is that it is inequitable: it allows households on higher incomes to retain the benefit while cutting it to some people on lower incomes. The second is that it is impractical; there is no easy way of identifying who should be affected.
The main argument for cutting Child Benefit seems to be that it will help to cut the deficit. If the government wanted to increase the burden on richer families, it has the option of clawing back the benefit through the tax system. It would make more sense to tax all higher rate payers, rather than only those with children. If the government was serious about cutting the deficit, they would be raising tax. The fact they are not talking about raising tax is a strong indication that this is not really about balancing the books. They are focusing on public spending, which is quite a different issue.
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.
6th October 2010
When the Chancellor announced, shortly before the Conservative party conference, that Child Benefit would be withdrawn to families with high earners, it was clear that no-one expected the storm of protest. Iain Duncan Smith had called the idea of paying benefits to richer people “bonkers”, and up to that point the newspapers had seemed to agree.
The government’s reasoning made some sense. Child Benefit is effective because it is simple, takeup is virtually universal and it has no discincentive implications. Means-testing Child Benefit would be self-defeating, and pointless – there is already a means-tested benefit for families with children, in the shape of Child Tax Credit. The government was looking, then, for a simple administrative trigger that could make a practical distinction, and they thought they had found it. The central argument for keeping Child Benefit, however, its its universality – a point the press have not, to this point, seemed to understand. We don’t means-test people using schools, hospitals or roads for many reasons, but the most obvious one is that it would be nightmarishly complicated if we tried to do it. Child Benefit is built on the same logic. Every alternative is more difficult, more complicated, and more burdensome.
Many of the complaints have focused on the unfairness of the proposal – the implication that two earners might retain the benefit when a single high earner cannot. There are two problems. One is that Child Benefit is still mainly received by women, and stopping benefits to women because of men’s earnings is not popular. The other is that every attempt to respond to changes in people’s circumstances comes with complications. People with fluctuating earnings will not know whether or not they are entitled; people who become unemployed will be entitled at some points and not at others. Some people will only know that they are in the higher tax bracket and the end of the tax year, and adjustments will have to be made. These issues have blighted the Tax Credits scheme and inevitably they will blight this change.