Politicians like to use smoke and mirrors. Such devices can be extremely useful to make policies look better than they actually are or to hide uncomfortable truths. And so it was this week with the Government’s plans for a universal state pension of “£140 a week”, articulated by Iain Duncan Smith, the Work and Pensions Secretary, in a speech to the charity Age UK.
Examine this “policy” in more detail and you see that it is far from being as generous as it appears and is far from even being a policy; “aspiration” would be a more appropriate word. Government insiders have let it be known that the ambition is for the basic state pension to become a universal, non-means-tested weekly payment of £140 by 2016. That may sound like a generous uplift to pensioners who at present receive only £97.65 a week on the basic state pension, but they should not get too excited because the raised payout will be given only to people retiring after 2016. All existing pensioners will continue to receive their pensions under the present, less generous, regime. But future pensioners should not jump for joy either because £140 a week by 2016 is hardly a giant windfall. Assuming that the current rate of inflation continues, it is the equivalent of only a 7 per cent increase in real terms on the current payout. Of course, inflation is likely to fall back from its present high but, even so, the £140 figure must be seen in perspective.
Another reason for scepticism is that the plans have yet to be officially agreed. Despite Mr Duncan Smith’s speech this week, the proposals will not be confirmed or their costs accounted for in the forthcoming Budget. The problem is that there is resistance to the idea in the Treasury. As anyone who knows the workings of government will testify, projects such as this rarely get far without Treasury backing. Of course, the very fact that Mr Duncan Smith made this speech suggests that he has won some sort of agreement from the Treasury but until the details are laid down in black and white in the legislative programme there is a significant chance that the universal pension will remain only an aspiration.
So now that we have cleared the political spin, what of the proposal itself? Does the idea of a universal state pension stand up to scrutiny? The answer is an emphatic “yes”. At present, the UK has about the most complex state pension in the world. Most people approaching retirement have no idea what they will receive and even government officials are often left baffled by the complexity of the system. How can people be expected to plan for their retirement if they do not know how much they will receive?
But, more importantly, the existing system is unfair to women and discourages low earners from saving for retirement. At present, the means tested Pension Credit guarantees the elderly a minimum income of ��132 a week — about £35 a week more than the basic state pension. This means that there is no real incentive for people who earn very little to save because if they do, they might be excluded from this benefit when they retire. A universal pension that shows no regard to a person’s savings or National Insurance contributions means that everyone is guaranteed to benefit from saving for their retirement and that women are not unfairly penalised for taking time out of work to raise a family. Not only that, but the abolition of means testing would also reduce bureaucracy costs (and we know to our peril that pensions of bureaucrats certainly are not cheap).
Advertisement
Removing means testing is also important because the Government is set to auto-enrol millions of workers into the new National Employment Savings Trust (Nest) from 2012. If means testing continues, hundreds of thousands of people might start saving into a scheme that will make them no better off when they retire than those who save nothing at all. That cannot be right.
Furthermore, abolishing means testing should help to cut pensioner poverty. Almost two million pensioners who are eligible for the Pension Credit do not receive it because they are too proud or too intimidated to go through the bureaucratic claims process. Instead they live on a pitifully low income.
Irrespective of how generous the universal state pension might eventually be, it seems a universally good idea. Quite why the Treasury is so resistant is a mystery.
Government must stick to pension reforms
Three cheers to Lord Hutton for his report this week on public sector pensions. Any notion that State employees should strike over these modest and sensible proposals is absurd.
Advertisement
For a start, the only people likely to suffer significantly from the switch from final-salary to career-average pensions are higher-paid executives. The bulk of employees at the lower end of the income scale won’t see much change.
Public sector employees have to understand that life expectancy is rising so the current system, which was designed for a different era, is simply unaffordable.
Any public sector unions complaining about this are actually being desperately unfair to their “comrades” in the private sector. Why should low-income workers in the private sector, who have much less generous pensions and employment rights, and no better pay, have to subsidise the extended and guided retirements of their public sector counterparts? That is unfair.
Even a £4,000-a-year public sector pension would require a fund of about £100,000 in an average private sector scheme — a figure most employees could only dream of accumulating. The average private pension pot used to buy an annuity is only £32,000. The Government must stand firm.