Budget 2013: Pension reform will allow the government to put a positive spin on public finances
After committing to introduce the ‘single tier’ state pension a year earlier than planned, in 2016 rather than 2017, you would be forgiven for thinking that George Osborne is in listening mode. The highly vocal brigade of 80,000 ‘double whammy’ women who complained they were missing out on the new pension (which had originally been intended for 2016), as well as being forced to retire later as female state pension age rises rapidly over the current decade, have been assuaged.
There may however be something slightly more sinister going on. Despite the government’s position that state pension reform would be fiscally neutral, the single tier pension actually increases government revenue by ending ‘contracting out’, and as such the National Insurance rebates offered to employees and employers with ‘defined benefit’ private pension schemes in return for forgoing entitlement to the state second pension.
The discontinuation of contracting out raises around £5.5 billion per year. Osborne seems to want to get his hands on this money sooner rather than later, hence the quicker introduction of the new pension system. Some of it will be used for a few headline-grabbing initiatives, such as the introduction of the Dilnot reforms to social care finance, and the new system of childcare subsidies.
A greater portion of it will probably be ‘banked’, perhaps helping to mask lower than expected National Insurance revenue forecasts resulting from the likely revising down of growth projections. The government continues to claim that the money will not be used to for net revenue raising, i.e. as a spending cut, but we’ll have to wait until the detailed 2016/17 spending plans are announced before we can see whether the coalition sticks to its word.
The central problem is where the extra revenue is coming from. In large part, it is being taken directly out of departmental budgets, as the need for public sector employers to pay higher employer National Insurance contributions essentially increases the public sector wage bill. Unless public sector employers are compensated for this, there will be a further squeeze on public services.
This would, for instance, put the government’s commitment to maintain the NHS budget in real terms in serious jeopardy. The numbers might well show that Osborne is not raiding NHS coffers, because the Dilnot reforms, which we estimate would cost roughly the same as the new costs on NHS employers, will be funded through the same budget. But this would be akin to getting off on a technicality.
The introduction of the single tier state pension was delayed in the first place because of the care that needed to be taken in unravelling the current state pension system. In fact, 2017 had only been pencilled in as the earliest possible implementation date; the smart money was on a further delay, perhaps until 2020 when the equalisation of male and female state pension ages would be complete.
The abolition of contracting out causes particular problems for private sector employers with defined benefit schemes, which it will be difficult to work through in just three years.
We would be doing the Chancellor a kindness to conclude all that is going on here is a ploy to win the 2015 grey vote. The fact that the government published analysis, at the beginning of last week, casting doubt about the extent to which the 80,000 women will lose from being excluded from the new state pension, tells us there is more to this story (the analysis was flawed: the 80,000 will mostly benefit from an earlier introduction, but the point is the government were not saying that a few days ago).
It should not be overlooked that the earlier introduction in fact creates a new cohort of losers too, as the means-tested Savings Credit benefit for pensioners will now be abolished in 2016 rather than 2017.
What this is really about is an attempt by George Osborne to make the public sector pay for his failure to bring about economic recovery, exploiting the generally positive reactions to the state pension reform plans, masterminded by the Liberal Democrats in the form of pensions minister Steve Webb, to spin the decision as good news. (This might explain the strange incident in parliament on Monday, where Webb issued a ministerial statement on state pension reform, which consisted of a single sentence announcing his intention to make a ministerial statement on state pension reform.)
Pensions policy has for the last decade or so been spared the kind of reckless politicking that this decision appears to represent. This has been necessary to begin to solve the endemic problems that have plagued the UK pensions system for many years. Budget 2013 may be about put this agenda at risk.