Yorkshire Post: Radical Rethinking – the only way to solve pensions crisis
Yorkshire Post: Radical Rethinking – the only way to solve pensions crisis
by Dr. Ros Altmann
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Should we be worried about our pension prospects? You bet we should! Private pensions have been decimated by the economic crisis and our state pension is about the lowest in the developed world. Already, just under half of all pensioners end up having to claim means-tested benefits to avoid poverty. We are heading for a nation of impoverished pensioners, while the Government keeps claiming its pension reforms have sorted everything out for the future.
Do you remember the Pensions Commission in 2005? Led by Adair (now Lord) Turner, it was asked to investigate reports of a pensions crisis. Amid much fanfare, the Commission concluded that we did not actually have a pensions crisis! However, it did say there could be a crisis in future unless reforms were introduced. It produced its Report, titled ‘A New Pension Settlement for the Twenty-First Century’, which made recommendations for reforming both state and private pensions. It was this Report which formed the basis of the Government’s 2007 package of state pension changes. The Prime Minister heralded these as the most radical reforms for half a century, that would remedy the unfairnesses and inadequacies of the state pension, improve private pensions and see us through the next half century.
Most of the reforms will not come in until 2012 at the earliest, but before they have even started, Lord Turner, the architect of the changes, has now said they will not last! In a recent interview, he has admitted what many people knew at the time, that he should have been more radical. So, pension reforms that were supposed to sort out our problems for the next fifty years have already been declared inadequate before they start!
The Government is claiming things are sorted out when they are not. Despite brilliant analysis, the Pensions Commissions conclusions and recommendations were wrong. We did have a pensions crisis then and it has worsened significantly now.
Indeed, the forthcoming reforms of the state pension represent little more than tweaking the current system, which was designed for the 1950’s. They are just a half-way house compromise, giving with one hand (linking the Basic State Pension to earnings in future), but taking away with the other (by linking the Second State Pension to prices instead of earnings in future) and raising the pension age for everyone. This is really all about trying to control costs, rather than paying decent pensions. Even after all the complex reforms, nearly half of pensioners are likely to still need means-tested pension credit to escape penury. But, of course, if they are on means-testing, their private pension savings or earnings from part-time work will be penalised. That leaves a trap for future pensioners which the current reforms have failed to remove.
A much more radical redesign is required to cope with 21st century realities.
We have wasted four years now on the pension equivalent of re-arranging deckchairs on the Titanic. Our state pension system is going down, with pensioners at risk of drowning in complexity and inadequacy. At last, Lord Turner has recognised the need for more radical thinking.
His interview suggests he has at last come round to the idea of a ‘resident’s pension’. This would sweep away the current ludicrously complex system, by rolling all three elements – Basic State Pension, Second State Pension and Pension Credit into one simple state pension for all. The resident’s pension would avoid mass means-testing of pensioners (so pensioners would not be penalised for having saved) as well as encouraging far more flexibility around retirement ages and the process of withdrawal from work.
In fact, Lord Turner now says the pension age should rise to 70, not 68 and much sooner than 2046. I would rather suggest we need to think differently about retirement. There should not be one age at which everyone thinks they should no longer be doing any work. Retirement should become a process, rather than an event, with part-time work as you get older helping to supplement any pension income, without being penalised by means-testing.
These are absolutely crucial elements of a sustainable solution to our pensions problems which have become even more urgent since the Pensions Commission’s disappointing recommendations came out. We need a radical rethink of both pensions and retirement.
I do hope that Lord Turner’s remarks will represent the start of a new assessment of our pensions crisis – waking up to the scale of the challenges ahead. The first and essential element of a sustainable solution is to overhaul the state pension, simplify the system and make it a stable base on which private savings can safely be built. Then people can decide whether and how much longer they want to work, rather than being forced to choose between penury or working till they drop.