Daily Mail – The Pensions System Needs a Radical Overhaul

by Dr. Ros Altmann

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Pensions have hit the headlines again with Conservative proposals to increase state pension age more quickly than planned. This is another example of old-fashioned thinking which will not sort out our pensions crisis. Yet more tinkering with the current system is not what we need.

Of course working longer is inevitable in future, but just delaying the starting age for state pension payments could simply mean more pensioners on means-testing and struggling to survive, unless accompanied by other changes too.

We need to radically rethink both pensions and retirement. Policymakers have not yet risen to this challenge.

In the next ten years, the population over age 65 will soar and the number of people retiring could increase by 60%. This will place significant burdens on younger generations of taxpayers to support increasing numbers of pensioners. Given the dramatic deterioration in public finances, the Tories propose accelerating the increase in starting age for state pensions to 66 in 2016 for men and by 2022 for women. But this is not a solution.

Workplace reform is needed, with employers being required to make part-time work available to people in their sixties and even beyond. Most people are not ‘old’ at 60 or 65 these days, they are often in good health and many jobs are far less physically demanding than used to be the norm. As the proportion of younger taxpayers falls, we have to encourage people to work longer, or we face long-term economic decline. We need a social revolution, similar to that which we have already achieved for women.

But reform of state pensions is also essential if we are to achieve a sustainable pension settlement. Our state pension is too low and too complex and even a full pension is not enough to live on.

At the moment, the social welfare function of pensions is not being adequately fulfilled by the national insurance system. In the past, employer final salary schemes were expected to compensate for the inadequacy of the state pension. However, outside the public sector almost all firms have closed their schemes, so future workers cannot rely on a good employer pension.

The disgracefully low level of our state pension (just about the lowest in the developed world) has left millions of pensioners in need of means-tested top-up benefits such as pension credit, in order to avoid poverty. But anyone claiming these benefits is penalised for having saved. Some or all of their private pensions will be taken away by the means test.

This then undermines the other function of pensions – which is long-term savings set aside while working and locked away for many decades until retirement. Furthermore, if claimants try to work to increase their income and earn more than £5 a week, they risk losing much or all of their earnings.

This system is unsustainable. State pensions undermine private pensions and disincentivise part-time work too. Until we abandon the idea of mass means-testing in the state pension system and pay a decent state pension to all older people, we will not have a long-term solution. The age at which this ‘residents’ pension’ starts can be determined by an independent review body – the Conservatives have already committed to holding such a review and it is part of Labour’s plans too.

But any review needs to consider the whole picture, not just one part. By adjusting allowances and reliefs and ending contracting out we can certainly afford to pay decent state pensions. Then, at last, we can bring some stability to our system, rather than constant changes that we have had for years. A radical overhaul to bring pensions and retirement into the twenty-first century.