Two stories jumped out at me this week as being deeply connected. Stephen Tall praised Ed Balls for not ignoring the huge chunk of welfare spending that goes to pensioners. Then, a new website from Public Health England reminded us of the country’s large health inequalities. These inequalities should give us extra cause to question the fairness of current spending on pensioners.
As Stephen wrote “Spending on the state pension will increase by nearly 20% in real terms between 2010–11 and 2017–18.” The challenge of an ageing population was present even before the financial crisis. It’s now even more essential to consider how public spending can be made to add up, and whether we’ve got it right on pensioner welfare spending, pension tax incentives and the pension age.
Is the state pension progressive? Well, it is a universal benefit that goes equally to most OAPs, and pensioners are on average poorer. And the Coalition’s Single State Pension will make it simpler and more equitable. But the total amount you get from the pension also depends on the length of your retirement, and the grim truth is that poorer Brits don’t live as long as richer workers.
Men currently receive the state pension from 65, and the “pensioner freebies” earlier. But ONS figures show that while a male ‘professional’ (at birth) could look forward to over 15 years of retirement (to over 80), an unskilled manual labourer might expect just 8 years (to 73). If anything, this inequality has grown over time.
As reinforced by the premature deaths website, the chances of the unskilled worker reaching 65 to ‘get something back’ are much less than for managers and professionals. With an average life expectancy of 73, the majority of unskilled manual labourers in this country will never receive the free TV licence, nor the higher rate of winter fuel payment (nor the highest personal allowance, now to be phased out). Even for those who reach 65, the average professional will live almost 30% longer beyond that than their unskilled counterpart. That means 30% more state pension – even without future increases, to say nothing of those other ‘universal’ benefits.
A long-running political stats issue is that we can only look at snapshots of incomes at a particular time. For individuals, the unemployment or low income caught by these snapshots might not be permanent. Ideally, however, we would also look at lifetime incomes and ensure that the tax and welfare system redistributes to those whose lives as a whole are more financially deprived. With higher-class individuals living longer, the state pension and pensioner freebies may not fulfil this function. This is in contrast to working age benefits, where benefit receipt is likely a much better predictor of lifetime poverty.
I don’t mean to suggest that because the state pension etc. on average are worth less to the ‘lower classes’ that they should therefore be scrapped. As most people see it, workers pay in via taxation and then take out in old age, even if the unpredictable and inscrutable black box in between is more like a Ponzi scheme. So (even while ending the additional state pension) it might be reasonable for the rich to pay more in and then take more out through longer lives. But the inequality is yet more reason to look critically and carefully at pensioner spending and the pension age.
Ian Mulheirn at the Social Market Foundation wrote an excellent article on this topic, saying: “A higher uniform pension age in this context is only going to hand a greater proportion of pension spending to those who need it least, while cutting the entitlement of the lower-paid. This is hardly fair, not least because a well-paid professional is likely to have greater capacity and desire to work longer…”
His solution – tackling both the fairness and state pension age problems – is very intriguing:
Rather than paying everyone a fixed income from an arbitrarily chosen age – too early for some, too late for others – government should instead give citizens an equal lump sum at the age of 60 [which must go into a pension scheme], leaving them to choose when to take it to an annuity provider to convert into a monthly pension income. Let’s call it the ‘state pension pot’. Those who choose to work longer would be rewarded with a higher income from their annuitised state pension pot upon retirement. And the new arrangement would be much fairer since annuity providers would reflect the lower life expectancy of lower-paid citizens in a higher annual retirement income.
It would be right to say we must do more to reduce these health inequalities in the first place, but do the necessary policies cost money? If so, the chances are that they’ve been cut to make way for increased spending on those living longest.
* Adam Corlett is an economic analyst and Lib Dem member
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15 Comments
really intriguing idea
Ian Mulheirn
Rather than paying everyone a fixed income from an arbitrarily chosen age – too early for some, too late for others – government should instead give citizens an equal lump sum at the age of 60 [which must go into a pension scheme], leaving them to choose when to take it to an annuity provider to convert into a monthly pension income.
When will the wonks learn that most people DON’T want to spend their lives playing wheeler-dealer? There is a small proportion of the population for whom making financial gambles is fun. There is a very large proportion for whom it is incomprehensible.
For most people in the country this will just cause fear and anxiety. They won’t have a clue what is the best decision, and they will fear being taken for a ride by intermediaries i.e. salesmen for financial products. Look at all the financial product sales scandals we’ve had on recent years, PPI, private pensions, endowment mortgages etc. What is proposed here is to place people at the mercy of those responsible for all that. Most people will see this as EXTREMELY unfair since it means make the wrong decision, such as choosing a poor annuity provider, and your pension is much less than your neighbour’s. Most people are just not equipped to make good decisions on this sort of thing, and so easily taken for a ride by pushy salespeople. As the financial sales scandals show, it does NOT lead to competition pushing up quality. It leads to jobs for pushy salespeople, big commissions, and lousy products which make money for their providers because their providers put all their energy into the marketing and into fooling their customers into going for a product that meant big profits for the providers.
Most people want stability and security, not the roller-coaster ups-and-downs of having to monitor the finance markets. Stability and security means you can plan for the future, and that is liberty. Forcing people to waste energy on playing the market, knowing that the end result will probably be they make a poor choice and in effect get “Mug” stamped on their foreheads, takes away their time and causes mental damage as people worry and worry that they have not got it right.
I’m not sure if I would use the words fair/unfair for the state pension arrangements. But you are right in that it’s certainly, unsustainable.
When the state pension was set up, no-one realised that they were designing a Ponzi scheme, but as it turns out, that is what we have got. But it is not alone as a model of unsustainability. Did the founders of the NHS, expect that one day someone would have to sit in an office and decide if it was ‘economic’ (or fair?), to spend £10,000/month on a drug to give a 70 year old with pancreatic cancer an extra six months of life?. Or how many cycles of IVF, a struggling infertile couple could have?
This welcome debate should try to avoid the simple politics, of taking an axe to the various untenable ‘welfares’. This is surely, part of a broader ‘conversation’, that should delve very deep, into how we view ourselves and society, and whether we have the right balance throughout our life spans?
[ Some food for thought ] ~ Have we subliminally, re-classified ourselves into pre-producers (children and the young), Producers ( 18 to 60 ), and post-producers (the elderly)? And have we misplaced our values of people, based on these unspoken assumptions of our economic value to society?
My gut feeling is that, as this debate unfolds over the next decade, we will realise that we have unwittingly, painted ourselves into many unsustainable corners, of which the state pension is but one. The state pension, alongside our other welfare and life expectations, is something we will ALL, have to ‘re-calibrate’. But fairness, should be the watchword, in how we deal with these issues.
The whole idea makes pension planning a lottery. I was made redundant at 63 and decided to treat it as retirement living on savings. In the 2 years to 65 my pension pot barely grew and annuity rates dropped. We already see too many people not looking at the open market option but taking the offer from the company they saved with and that company was probably chosen by their employer.
Leave it alone Adam. The chance of any scheme like this being adopted is zero, so devote your intellectual capital to something else.. The OAP will continue to be contributory during work, and taxable after the retirment age. The amount payable will be dependent on contributions, it will continue to advance in line with some indicator of purchasing power, BUT the regulator of overall cost will be the retirement age – which will gradually move upwards over the years. Now some people die before other people, it was ever thus. Premature deaths are caused by a variety of factors: accident, illness, lifestyle, suicide or genes. That is one of unfairness of the human condition – and there nothing to be done about it.
I am most surprised that giving every single citizen a lump sum to pay to an annuity provider is actually being considered seriously. The requirement for millions of private sector workers to buy an annuity is one of the major structural faults of the current private sector pension system.
A recent inquiry into annuity charges showed that the big companies who sell annuities trouser up to a quarter our hapless citizens’ pension pots in costs and profits when they sell us a pension. So what the Social Market Foundation is proposing, in practice, is to force our citizens to give a quarter of their state pension to the financial services industry. It is absolutely the worst, most wasteful, idiotic proposal they could possibly have thought of and frankly they should give it a decent private burial to spare their blushes, no flowers please.
A bonus fact from The Economist (as the health website also shows): In 2008, men in the north were 20% more likely to die under the age of 75 than men in the south. So there may be a regional inequality issue here too.
@ Matthew and Peter: I think the current state pension is far more of a lottery. I have no idea at what age I will qualify for the state pension, or what form it will take by then (if any); those retiring can’t be certain what its level will be in 10 or 20 years’ time; and there’s no way to ensure that a particular generation pays in enough to cover its state pension liabilities. The state pension is only predictable in so far as we have faith that future taxpayers and multiple governments will be both willing and able to maintain the pension at some generous level (who knows exactly how generous). In contrast, buying a private sector annuity means you can choose when to start receipt, and can be sure that (for example) you will get the same real amount every year, indexed to RPI, for the rest of your life – guaranteed. There’s far more stability and security there.
While annuity rates and pension returns vary, it’s probably better that they match up to reality – e.g. if the economy tanks or longevity increases by more than expected – than setting a not-so-flexible state pension level & age far in advance and then finding out that our assumptions about their affordability were completely wrong.
Sure it would be nice not to have to worry about choice, and some people will get better deals than others, but people wouldn’t have to “spend their lives playing wheeler-dealer” – it’s one decision in your entire life. I don’t think forcing people to make one financial choice in their lives – with as much assistance from the state as you like – represents a loss of liberty.
If you really like, Matthew, the state could be the default annuity provider for this state pension pot. The key differences from now would be that the level of the state pension would be guaranteed (you could pay extra for a triple-lock if you liked!), you could retire earlier, and rates would be personalised to tackle the inequality issue.
@Janice: I know you know a lot more about this area than me, so I won’t argue too much! I see that “there is up to a 20 per cent difference in the best and worst rates” offered, and that the FSA/FCA is investigating. I imagine if we did give people these pension pots, we’d need a lot more advice and regulation to help people avoid raw deals. But that doesn’t mean the best are so wasteful. And there will of course be administrative costs that need to be borne by these annuity providers; costs that would no longer be borne by the government.
It’s easy for LDs to bash the idea of the financial services sector being involved at all in the state pension, but I’m not seeing any alternative suggestions for tackling the issues I raised of inequality, unmanaged expenditure, and pension age. We really do need to have a debate about whether increasing the pension age is the only viable way to control these costs, given the strong element of unfairness.
As I suggested in my comment above, it would even be feasible for the government to take account of individual health / life expectancy in offering personalised state pensions – without involving the private sector – though that might be unacceptably divisive.
Annuity rates alongside management fees mean that the bulk of the value added by private pensions go to the industry rather than the saver. Public sector DB pensions on the other hand will all need extensive ongoing topups from the taxpayer. Neither is at all satisfactory.
So I agree that the annuity product is not nearly good enough for this policy to be prudent.
A flexible state pension age – with higher or lower state pension levels to compensate – would make the system a little fairer in fact, albeit not in appearance.
So where are these honest and upstanding Lib/Dem MP’s that were totally against the abhorrent discrimination of the frozen pensioners then ? Steve Webb, Nick Clegg and all shouting off their mouth when in opposition and now finding excuses to do nothing. The freezing of the ex-pat pensions is something that should be dealt with now and all pensioners treated equally. So much for the Equality Act. So much for the integrity of ALL MP’s who sit on their hands except when it comes to giving themselves a raise. The Lib/Dems were the one party that were promising to remove this discrimination but have failed miserably with broken promises. You should all be doing some self examination and remember the code of conduct that you agreed on taking office that says : Members have a duty to uphold the law, including the general law against discrimination. What is it about that , that you do not understand ?
As usual never a mention of the 1.1 million pensioners who do not draw any benefits at all. They are the pensioners who retire abroad and they do not get the “add ons” like bus passes, free prescriptions etc.. they actually save the country around £7,000 per pensioner a year. I will add that the state pension is not included in the benefits category as entitlement to a state pension is dictated by ones contributions , we have paid for them with our hard earned money they are not a “gift” from the government. Also never mentioned is that less than half of expats have their state pensions frozen just because of where they live. This is blatant discrimination and this and past governments have got away with this, how I do not know, as discrimination is illegal and goes against the Equality Act 2010 and the new Commonwealth Charter which states that all Commonwealth countries are “implacably opposed to all forms of discrimination”. This in justice must end, all state pensioners paid their NI contributions under the same terms and conditions ALL are entitled to be treated the same, shame on anyone who refuses to see that this outrageous policy is wrong.
The case of frozen pensions highlights what I’ve said above , i.e. that the state pension should be more of a (funded) legal guarantee – as the ‘state pension pot’ idea would be (at least once you hit the eligible age) – than the whimsical Ponzi scheme we have now. Steve Webb said about frozen pensions that “if the system worked in the way that most people think [you pay in, the money is invested, then you take out], it would not matter where a person lived”. The point is that the system doesn’t work that way: if we want that kind of system then we need big reform.
So why does Steve Webb ignore the plight of the frozen pensioners? He can right this wrong with a stroke of a pen, as for his quote about the system if it was different that “it would not matter where a person lived” is utter rubbish, more than 600,000 expats get annual uprating under the system as it stands now so how come this “system” doesn’t work for the 4% who are frozen. Once again in trying to defend this utterly disgraceful discrimination he has opened his mouth and made a completely illogical statement. There is no excuse for this injustice, just change it.
Quite frankly, and quite unapologetically, I am, was, and still am, the greatest advocate of a state second pension scheme. I live very comfortably on my state pension, together with my earnings related state pension. I would seek to do battle with those who have sought to dismantle the system; furthermore, shame on those who consider it to be appropriate to freeze the pensions of those who choose to live overseas. Bring on grass roots politicians and legislators who live in the real world!
I think the fact that the Minister has stated that “if the system worked in the way most people think (you pay in, the money is invested, then you take it out), it would not matter where the person lived” is rather belittling and insulting to the public’s intelligence and especially to pensioners. The suggestion that the country of residence should be an integral factor in determining eligibility for index linking is simply a red herring. The process described in parenthesis is but a repetition of part of the obsolete and factually incorrect ramblings of Lord Hoffman used by the ECHR in the Carson Case judgement.
The plain and very simple truth is that by paying the mandatory National Insurance Contributions when working the contributor has formed a “contract” with the government by which he or she is guaranteed a pension on retirement. If people have contributed to the scheme under the same terms and conditions then, when in retirement, they should be allowed to withdraw under the same conditions. This is denied to the frozen pensioner. It is the number of qualifying years that is the determining factor. Country of residence and or length of time abroad are totally and utterly irrelevant; it is the individual pensioner who is being discriminated against by the government not a particular country.
I suppose one can sum up Webb’s grasp of the frozen pension issue – and perhaps the whole question of pensions – by his naive and ill informed refusal to withdraw (up to now) Clause 20 of the Pension Reform Bill which still incorporates freezing of the annual uprating.
He claimed it was not affordable ( when, according to the Advocate General, Juliane Kokoot, at the European Court of Justice, “budgetary considerations cannot justify discrimination”) as the £655 million required to up rate was not available.
Of course it does not take an economist to identify the stupidity in this reasoning. Clause 20 will not become effective until 2016 and the cost in the first year will, therefore, not be £655 million but NIL and in subsequent years it would only affect those who retire and then live abroad after 2016 – a negligible, albeit increasing, amount.
Indeed, when considering that the current discrimination against just 4% of the UK pensioner citizenship world wide uprating (at £655 million) is less than 1% of the annual total cost of State Retirement Pensions and also, as at 31st May 2013, the NI Fund had a surplus of £28.485 billion, the whole pension freezing policy – be it under the current scheme or that in his Pension Reform is indefencible – but then, so much of that Bill is a shambles should one really be surprised at his failure to grasp the problems?