From the TUC

Reform of pensioner benefits shaped by politics not principle

07 Jun 2012, by Guest in Pensions & Investment

The likelihood of the government reneging on its apparent commitment to pensioner benefits – such as Winter Fuel Payments (WFP), free TV licences, free prescriptions and eye tests, and free bus travel – increased significantly this morning after the Deputy Prime Minister Nick Clegg signalled his support for dramatic cuts in expenditure in these areas.

There may be strong arguments for and against the system of additional pensioner benefits as it stands. The real danger in the current political climate is that reforms are motivated simply by the positioning of coalition partners, and a desire to reduce the budget deficit at all costs.

Clegg has support in the form of Secretary of State for Work and Pensions, former Conservative Party leader Iain Duncan Smith, who last week described pensioner benefits as a ‘bribe’:

The welfare system is there to support you in times of need and when you get clear of it you should be clear of it… It’s rather daft to take tax off the middle classes and pay them a little bit back… That’s a very expensive way of giving a bribe.

Leaving aside the inference that only ‘the middle classes’ pay tax, the logical conclusion of Duncan Smith’s argument is that the welfare state should be thought of only as a safety net and that pensioner benefits should be means-tested.

Duncan Smith has the support of the Sun, as part of the newspaper’s ‘ditch handouts to rich’ campaign, but apparently not the Prime Minister, who remains wedded to his pre-election pledge that pensioner benefits would be ‘safe’ under a Conservative government.

The dilemma underpinning the government’s approach is not one of principle, that is, what form pensioner benefits should take in a modern welfare state, but rather one of political calculation, that is, which cuts they can get away with. The power of the grey vote is central to David Cameron’s strategy, but so too is the commitment to maintain the austerity plan beyond 2015.

It is arguable whether keeping additional pensioner benefits in place, but restricting entitlement through means-testing, would allow Cameron to maintain his commitment while satisfying both the Sun and the Treasury.

It is on this issue in particular that Nick Clegg finds himself quite isolated. Despite advocating dramatic cuts, his party has a long-standing opposition to means-testing, not least because of the complexity it creates.

Additional pensioner benefits could actually be means-tested fairly straightforwardly, by making only recipients of Pension Credit entitled to them. But even if this was acceptable to the Liberal Democrats, Pension Credit will effectively cease to exist from 2015/16 if the government’s plans for a single-tier state pension go ahead.

Alternatively, the benefits could be taxed. This, however, would probably by hugely problematic from an administrative perspective. It would be difficult to tax WFP at source, for instance, because they are paid by DWP not HMRC. Benefits like free TV licences (for the over-75s) and free prescriptions are obviously benefits in-kind rather than cash, and again administered by other departments.

Any attempt to tax additional pensioner benefits might therefore require more pensioners to go through the self-assessment system for income tax, and pay back at the end of the financial year portions of benefits they have already received.

Perhaps the hope, from Clegg in particular, is that the need to go through self-assessment might stop some pensioners from claiming these benefits if doing so would increase their tax liability. But WFP are not claimed, rather paid automatically by DWP based on state pension records. Introducing a need to claim WFP might convince some richer pensioners not to bother making a claim, but would surely also catch out many poorer pensioners too.

If pensioner benefits are going to be reformed in the near future, the agenda should be brought into wider discussions around reform of the state pension, rather than being addressed in isolation, and worse, used cynically by various wings of the coalition government to chase headlines.