A universal pension above means testing levels?
I have a post over at Left Foot Forward on the leaks about Steve Webb’s plans for a universal citizen’s pension. This would be set above the means-testing level by combining current basic state pension and the variants of the state second pension.
That post explains how the current system works and sets out what I think will be examined in the forthcoming Green Paper in broad principle.
This could be a progressive idea but I identify two basic issues:
- who pays for it?
- how do you unwind contracting-out?
Here’s some more details on the costs.
This suggests a foundation pension of £8,000 a year – a little above the suggested Government level.
It has clear benefits it:
could see pensioners in the lowest 25% of the income distribution improve their income by 27% by 2030 compared to the current system. The Foundation Pension at £8,000 per year could take around 2 million pensioners out of means-testing by 2050. Under the current system, by 2050 around 45% of pensioner households could be eligible for pension credit. Under the Foundation Pension system at £8,000 (in 2010 earnings terms) this could reduce to 25%.
But it’s costly. The PPI say it
could cost an extra £25bn per year in 2017 (in 2010 earnings terms) compared to the current state pension system. This is approximately 1.5% of GDP.
That is not much less than the estimated cost of paying all public sector pensions – and remember how unaffordable and unsustainable the government thinks they are.
So how do you pay for it?
If you end the state second pension by rolling it into the basic state pension then neither individuals nor occupational pensions will have anything to opt out of – therefore there is no need to provide reduced national insurance contributions in return. This could raise £8 billion a year from employers and employees – including those in the public sector already facing higher contributions. While that may be good value, it would undoubtedly be seen as a tax rise by those affected and is not politically pain-free.
Some pensioners would also pay a little more tax as their income would rise though I have seen no estimates of this.
That still leaves £17 billion to find.
The NAPF and those on the right who support this kind of move back a rise in the state pension age. This however increases the pensions of the better-off who tend to live longer at the expense of the shorter-lived poor. In any case it rather looks like Mr Osborne has already identified this as a source of funds for the Treasury, not as a way of boosting pensions.
A better source would be higher rate pensions tax relief. This cost £22 billion in 2007, but has since been limited. However removing all of this would be tricky in practice – a more practical proposal would be to limit tax relief to standard tax and then cap the amount. There are various ways of doing this, but none would raise as much as £22 billion.
So even this bold and progressive move would not on its own fill the gap, and it would require a greater tax contribution.
The NAPF fill the gap with a 1 per cent increase in NI contributions and a phased in increase in the state pension age. This leaves a £6 billion gap at first, but as savings from a higher SPA kick in it ends up being largely cost neutral.
But this government thinks NI is a tax on jobs – and reversed Labour’s planned increase.
I wish Steve Webb well in taking this forward, but there are immense practical difficulties in the way.
It may be that a very slow and gradual introduction – as hinted at in some papers today – might be more feasible. This might help with unwinding contracting out. But I suspect that rather a lot of older workers and current pensioners might have hoped for something a bit sooner after yesterday’s leaks.
It was remiss of me not to include a link to some powerful advocacy for this approach brought together by Baroness Hollis. This includes some much more optimistic costings prepared by the estimable Howard Reed. He suggests the extra costs of moving to a citizens’ pension set at pensions credit level would be £8b to £11b higher than current plans. While I suspect the PPI were able to throw more resources at this issue (and modelled a higher universal pension), this gap could be funded by politically feasible changes in pensions tax relief.
Significantly perhaps Steve Webb was also a contributor to this pamphlet. The Green Paper looks as if it will be rather interesting.