From the TUC

A universal pension above means testing levels?

26 Oct 2010, by in Pensions & Investment

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.

Probably the best source for looking at this issue is the Pensions Policy Institute report for the NAPF that aims to flesh out their proposals for a foundation pension.

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.

Update:

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.

6 Responses to A universal pension above means testing levels?

  1. Tweets that mention A universal pension above means testing levels? | ToUChstone blog: A public policy blog from the TUC — Topsy.com
    Oct 26th 2010, 1:01 pm

    […] This post was mentioned on Twitter by ToUChstone blog and Nigel Stanley, Nigel Stanley. Nigel Stanley said: @anthonypainter @nextleft Universal pension costs more than higher rate tax relief http://bit.ly/a7sodi further Touchstone post. […]

  2. Bryn Davies
    Oct 26th 2010, 1:49 pm

    There is much more to be said about all this. But a couple of immediate points:

    First, the DWP has a figure for everyone’s additional pension, including the notional additional pension that people have lost when they were contracted-out. This is because the State still pays all or part of the inflation increases that are due on the additional pension, which means it has to calculate what that pension would have been, had the individual never been contracted-out. So it would be straight-forward, at least administratively, to offset the actual or notional SERPS/S2P pension for everyone and not just those who have not been contracted-out. It would be manifestly unfair to make the offset against the £140 pension only for those people who will have actually paid more in NI contributions. It will not be as easy to explain to people who have been contracted-out exactly what is happening to their pensions, however. All they will see is what appears to be an arbitrary reduction in the flat-rate £140 pension that they expect to receive and they may not be mollified by being told that it’s because they have an occupational or personal pension.

    Second, we need to be clear about the likely impact that the end of contracting-out will have on existing contracted-out occupational pension schemes. This would affect the great majority of the members of such schemes and, for them, because of the end of the rebate, there will be an increase in their NI contributions of 1.6% of band earnings. This is not quite as trivial as some reports have suggested, particularly in present circumstances. But the employers’ NI contributions will increase by a more significant amount – 3.7% of band earnings. This bound to lead to employers with contracted-out schemes having yet another look at their overall pension costs and seeking to recoup the NI increase. So, without trying too hard to be alarmist, this almost bound to lead to even more scheme closures and cut-backs and, potentially, lead to the virtual end of defined benefit schemes in the private sector.

  3. The universal citizen’s pension « Same old played out scenes
    Oct 27th 2010, 10:10 pm

    […] see also Bryn Davies’s comments on the impact on contracted out pension schemes), present immense practical difficulties while the costs are likely to be well in excess of the suggested savings from abolishing the means […]

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    Nov 5th 2010, 9:31 am

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    Nov 28th 2010, 8:49 am

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  6. Andy Lafferty
    Nov 28th 2010, 6:43 pm

    “Pensions, Pensions, Pensions and benefits associated with PENSIONS!!” this is what it’s all about!!

    Pensions are paid for by UK tax payers to see them into a decent retirement. “That’s what they were designed to do!!”
    It would be easy to get them back on track if the cash wasn’t being siphoned off to fund other projects such as the EU, Ministers multiple state pensions and given away to third world countries whose economies are now growing faster than ours.
    What we need is a change in the law to provide a state pension funded by the people, for the people, owned by the people and definitely free from political interference!!

    All workers should continue paying into their state pensions as usual through their national insurance contributions. Upon death, the government should take 20% as a windfall death tax, the remaining 80% to be added to the state pension fund.
    The combination of personal pension and the state fund to be linked to the national average wage and pensions to increase in line with the cost of living index.

    Pensions become taxable along with national insurance contributions, empowering pensioners by way of enabling them to continue contributing to society and to look after themselves without feeling they have been thrown on the scrap heap after years of faithful service and contributing to society!

    Excess monies could then be used to pay for free prescriptions, free bus passes, to buy into the utility companies to provide reduced rate utilities for pensioners and to fund the NHS from an ever growing pot!

    Its simple to sort out!! And if the people stood together in a democratic way the way we….should be able to do?