Tag: pensions

Can we afford to support older people?

The Herald asked me yesterday to comment on whether we could afford universal services for older people; here is my response, as it appears. (The Herald website allows direct access to first-time users; after five views you have to register.)

The debate on free services for older people lumps three questions together. The first is whether we can afford to support services for growing numbers of older people. That question has been reviewed in many reports; the answer comes out, consistently, that the commitments are sustainable, but they will have to be paid for in higher taxes or contributions. Many people imagine that when they pay for pensions, that the money is being saved for their old age. In most cases, it isn’t. Contributions now largely pay for pensions now; the current generation of workers is relying on the next generation to pay for them in turn. The real test, then, is whether we’re willing to pay for pensioners now.

The second question is whether help should be free. The critical judgment is about what should be provided, and what should not. Some essential items we expect pensioners to pay for (food and telephones), some we don’t (personal care and prescriptions) and for some the signals are mixed (cleaning). The arguments for free services are partly about solidarity – services we want people to have and have a duty to provide – and partly self-interest, whether we’d want ourselves or our families to be charged in the same circumstances. Few people in Scotland would want everything to be paid for: it’s difficult to make the case that help with incontinence – an important component of health care as well as personal care – should not be free.

The third question is about universalism, whether benefits and services should go to everyone, or only those in most need. Services that test people’s needs are complex, difficult to provide fairly and can be expensive. Tests are often intrusive, burdensome, demeaning and many are put off from asking for help. Universal services use simple eligibility criteria, such as age, so are cheap to run. The basic argument for bus passes, for example, is that many older people need help, extending it generally allows those who need it to get help, and people who have alternative transport don’t use the buses. When money is short, simple generalised provision is often the way to go.

Citizen's Pension is sidelined

It appears that proposals for a Citizen’s Pension have been kicked into touch; I saw this first in an article by Simon Reade (“How politics put paid to the Coalition’s pensions reform”, i, 22nd September) but the main source of the reports has been the Financial Times, which I can’t link to here because it’s confined to subscribers. This decision goes beyond the question of postponing decisions till after the next election. When the government suggested a flat-rate pension in 2010, the proposal was for a universal payment for all pensioners. In later discussions it seems this has been changed to become a flat rate pension for anyone who has contributed for 30 years – which is line with the Beveridge scheme rather than the original idea of a Citizen’s Pension. The key difference is that those who have not been able to contribute or whose working life has been interrupted, especially women and people with disabilities, will be left out. That means that there will be no minimum income guarantee and that Pension Credit will have to be maintained.

The other long-standing weakness of the Beveridge scheme, of course, is that flat-rate benefits were never enough to meet basic needs. The reason why governments moved to earnings-relation was the evidence that continental schemes had proved far more effective in providing incomes in old age.

Life expectancy and pensions

A report by PWC on pensions draws attention to some fairly startling projections about life expectancy; they claim that pensioners born in 2050 will have an average life expectancy of 104. The source of the prediction are tables produced by the Office of National Statistics – this link goes to their main projection. For people born in 2050, the projection is that 48.4% of males, and 55% of females, will live to 100. The ONS also note that “As only one person worldwide has ever been verified as living beyond 120, estimates of numbers surviving to very old ages are highly uncertain.”

There are no strong reasons here for immediate panic. Even if the pension age stays at 66, people born today will not get their pension until 2078; and the troublingly long-lived babies of 2050 will get their pension in 2116. That is far enough away for our great grandchildren to be able to do the sums, probably a little more effectively than we can.

Taxing pensioners

The government’s plan to reduce the tax allowances of pensioners was clumsily presented. The issue is not, as the IPPR suggested, that pensioners must be expected to bear a greater burden in deficit reduction – that argument seems feeble when the purpose of economies is to support handouts in corporation tax and to reduce the demands made of very high earners. It is, rather, that the distributive implications for pensioners need to be seen in the round. “The net changes made by this government … mean that pensioners are better off.” That is the answer George Osborne has given to criticism, and it is a strong argument.

Pensioners are gaining in some ways, primarily through proposals to increase the level of state pension and in the ratcheting effect of the “triple lock” which means that pensions will rise faster than inflation. They are likely to lose in other ways – through this tax increase, the loss of the state second pension, increases in the pension age, and reductions in housing benefit. (The poorest pensioners, recipients of Pension Credit, will not gain in the short term – but they will nto lose out because of the tax increase, either.) The Chancellor may well be right, but it would be helpful to see the figures laid out more clearly.

A Citizen's Pension?

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.