Tax them, don’t axe them – pensioner benefit reforms should not be done on the hoof

by Dr. Ros Altmann

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Pensioners
– Taxing is far better than axing

Consider changing
the age of entitlement, rather than means-testing

Pensioner benefits becoming a
political football. The furore over pensioner ‘benefits’ is
hotting up. As the number of UK citizens reaching state pension age
soars, the cost of paying National Insurance pensions was always
bound to rise. There is a political backlash against pensioner
payments, but it is important to consider this issue carefully.
Rather than using pensions as a political football, it is important
to assess the situation comprehensively.

Substantial pension cuts are
already in the pipeline. The reality is that the bill for future
state pensions has already been reduced significantly, by raising
state pension age and reducing the generosity of the future state
pension. As a result of the coming state pension reforms, millions
of pensioners will end up with lower state pensions in future than
under the current system.

Two elements are being conflated:
It is very important not to address this issue in a knee-jerk
fashion. Let’s think carefully about what is involved. There are
two parts to this debate.

National Insurance pension triple
lock on Basic State Pension only. Firstly, the national
insurance state pension increases are under consideration. This is
the element of our national insurance system which people have paid
into all their lives – they have contributed to their future state
pension and, even after a full working life, the value of the UK
Basic State Pension at the moment is just £113-10 a week. This is
the part that David Cameron has pledged to ‘triple lock’ by
making sure that at least until 2020, the Basic State Pension will
rise by the higher of inflation (measured by cpi consumer prices
index), earnings or 2.5%.

No triple lock protection for
SERPS/S2P. There are also additional elements of state pension,
such as Graduated Pension, State Earnings Related Pension (SERPS) and
State Second Pension (S2P) but all these are not part of the promise
of the ‘triple lock’ and are only guaranteed to rise in line with
cpi inflation.

Triple lock on Basic State
Pension will still mean UK has one of lowest state pensions. The
promise to continue to increase the pensioners’ £113-10 a week
state pension by at least 2.5% a year is surely the very least that
pensioners could expect – our Basic Pension remains one of the
lowest in the developed world. Pensioner inflation rate is already
far higher than for other age groups and many pensioners struggle to
make ends meet unless they have private savings. Even those with
savings have seen their income disappear as rates are so low. From
2016, a new flat rate state pension may start, but most pensioners
will not be in the new system by 2020, so the Prime Minister’s
pledge really affects older citizens, rather than those newly
retiring.

So many bits of Pensioner
‘benefits’. Secondly, there are additional pensioner
‘benefits’ that are paid to all those above a certain age. These
payments include free travel (bus or train passes for senior
citizens), free TV licences from age 75, free prescriptions and
medical tests, as well as Winter Fuel Payments of £200 a year (or
£300 a year for the over 80s). The value of these benefits adds up
to significant extra sums for many individuals, depending on whether
or not they are used. I believe it is this area of state spending
that needs to be carefully examined, but in a considered manner,
rather than just using them as a political football.

They could be taxed to save
money: These pensioner payments are, in general, tax free. That
means they are worth far more to higher income pensioners.
Significant sums could be saved by taxing these payments, which would
be much better policy than trying to strip them from what are often
called ‘better off’ pensioners.

Where would you draw the line as
to who qualifies as a ‘well off’ pensioner?If it is only
those on top rate tax, then very little money would be saved because
only around 2% of pensioners actually pay higher rate tax. If we
take benefits away from all pensioners and force them to claim
means-testing, then those who have saved for their future will be
penalised relative to those who did not or could not do so. This
would be a powerful disincentive to save in future pensions.

Streamline the age at which
benefits start. The age at which many of these benefits are paid
could also be debated. The current system has different benefits
starting at different ages and there seems little rhyme or reason to
the decisions as to which benefits begin when. For example, free bus
or train travel can start at age 60, while TV licences are received
at age 75. Winter Fuel Payments start from state age at £200 a
year, but then go up to £300 a year from age 80 – all of these tax
free. Let us decide what the appropriate age should be for the
benefits with a proper review of pensioner support and how it is
paid.

Free travel only off-peak or
starting at a later age would save significant amounts. Free
travel from a later age, and perhaps only offering travel for free if
it is off-peak, would save money, without taking the payments away
from pensioners who see their bus passes as a lifeline that enables
them to get out and about and keeps them fitter and more active.
These benefits could also be taxable which would raise revenue
without adding to means-testing burdens or increasing disincentives
to save.

Means-testing would be a huge
mistake: The whole thrust of state pension reform from 2016 has
been designed to ensure a simpler pension system without mass
means-testing. If the Winter Fuel and other payments were then
means-tested instead, the whole agenda of reform that tries to
encourage additional private pension saving would be undermined. As
auto-enrolment spreads to all workers, the last thing we need is to
bring back mass means-testing for millions of pensioners. This would
send the message that only those who do not bother or cannot afford
to save for retirement will receive the pensioner benefits later on,
while those who do manage to set aside money for retirement will be
penalised in the state pension system. This may be popular with
those who want to take money from older people in order to cut public
spending, but it would be a retrograde step for pensions policy in
the longer term.

Let’s hope policymakers
recognise the need for proper considered reform rather than pandering
to populist rhetoric. Taxing is far better than axing benefits and
streamlining them is much more sensible than stripping them away.

ENDS
Dr. Ros Altmann
6 January 2014