Citywire article, Westminster Blog, January 2013

2013 has started with political battle lines being drawn around pensions and policies for pensioners. It seems that those already retired, or well-off enough to put plenty of money aside for their future, are considered an attractive target to raid when times are tough. This is interesting politics.

Labour has proposed restricting tax relief on top earners’ pension contributions and using the money to help the long-term unemployed, while the LibDems want to take Winter Fuel Payments away from the many millions of pensioners who do not qualify for or claim Pension Credit, in order to fund reforms to social care. Meanwhile, David Cameron has once again reaffirmed his commitment to maintaining free pensioner benefits at least for this Parliament.

The political thinking behind these proposals is not expressly stated, but it seems to me as follows:

The LibDems are anxious to recapture young voters’ support following the increase in tuition fees which they pledged to oppose and have decided that taking money from pensioners will have support of younger generations, while most older people will be more likely either to stay with Labour or Tories.

Labour, meanwhile, has decided to target taking money from top earners’ pensions in order to fund additional welfare spending without resorting to additional borrowing. The wealthiest are less likely to support Labour and reducing high earners’ pensions tax relief will be more popular with their core voters.

Meanwhile, the Tories are keen to try to keep as much pensioner support as possible. The older generations are a very powerful political force, and over 50s will probably comprise the majority of voters at the next election. David Cameron has probably calculated that reneging on his commitment to maintain the pensioner benefits could be hugely damaging for his party in 2015.

We need less means-testing, not more. I believe that restricting pensioner benefits such as Winter Fuel Payments only to pensioners who claim means-tested benefits would be a massive mistake.

Those who have managed to set money aside for their future would find themselves penalised, while people who did not do so would still get extra payments. This would be yet another disincentive for saving. The ‘strivers’ would be punished for their prudence, while those who have spent all their money would be rewarded.

Many pensioners live on very modest incomes and a few pounds a week can be a significant loss to them. Most of those who have a little more than the means-test qualification level have worked hard and saved hard for their future, always striving to be self-reliant, without claiming money from the state. They chose to save rather than spend all their money, so they would have more in later life but, having reached retirement, they find their savings under threat, as policymakers try to find money for new schemes to help others who have not managed to put much by for retirement, or who are over-indebted.

When will politicians wake up to the danger of damaging side-effects when they tinker with pensions policy. Yes, we need a radical overhaul of the pension and social care system, but any reforms need to take a comprehensive approach, rather than tweaking bits of the system and undermining other areas of pensions. There has been far too much piecemeal reform already.

The more policymakers punish savers, the less people will save. Means-testing is not a solution as those who find it hard to sacrifice current spending will be less inclined to do so, if they feel they will lose out later as a result.

Politicians should be celebrating the fact that many pensioners now have some income to help them avoid poverty and be encouraging younger generations to follow their example of self-reliance and thrift, rather than proposing policies that will put people off saving for retirement.

ENDS