The rumoured proposals for a new state pension are straight from the Lib Dem handbook. Clearly, Steve Webb has been given complete control of this aspect of policy and all the old liberal and Conservative principles have been kicked out of the window.

It appears that there are proposals within government for a much higher state pension to replace the two existing state pensions. Its financing would come from reduced administration costs, reduced provision of means-tested benefits and a higher state pension age. The new pension would be available to everybody who lived here with no regard to National Insurance contribution records. This proposal is rather like the navy mining our own ports – the government is limiting its own future scope for restraining public spending.

Many commentators have noticed how difficult it was for the coalition to remove unjustifiable benefits for the elderly such as free bus travel, free television licenses and the winter-fuel allowance. In contrast the government had no real trouble removing benefits for children and will probably have little effective opposition to allowing an increase in student fees. There is a good reason for this: 43% of active voters are aged 55  or over. This proportion is set to rise rapidly to 55% within 20 years. The government will not do anything to undermine the financial position of the elderly – they will continue to gain at the expense of the younger generation.

A so-called citizen’s pension will have its value determined by parliament each year. In other words, it will be sheer weight of electoral power that will determine the size of this new pension. Things are not looking good for Britain’s youngsters.

There are certainly several problems with the current state pension systems, but reform could be quite straightforward along lines that are liberal and sustainable. The current system involves employees (and many who work within the home) accruing two pensions side-by-side, with rights accruing for each year of national insurance contributions that are made. Special credits are given for carers and so on. The rights accrued under these two pensions are just about comprehensible when considered individually but completely incomprehensible when taken together. The government should simply combine these two pensions into one but, crucially, it should maintain and reinforce the contributory principle.

Each year for which somebody pays national insurance contributions, they should earn an entitlement to a fraction (for example, one fortieth) of a given full pension and this should be indexed to prices until retirement. With a high retirement age and a combination of the two existing pensions, the problem of means-testing could probably be alleviated for most people. Once pension was accrued in this way, it could neither be added to nor taken away  – the value of each year of accrued pension would be fixed except for the pre-determined indexation until retirement. If the government decided to increase the level of pension that accrued for each year of work, then it would immediately lead to an increase in national insurance contributions for all workers. In other words, each generation of workers would have to meet the costs of the higher pensions they themselves accrued out of their own pockets. When somebody retires, they would receive the pension they had accrued. Changes to the rate of pension that accrues each year would only apply to the pension accrued after that date. When the pension was actually paid it would, again, be indexed to prices (or some index between price increases and wage increases).

There are only two possible objections to this approach. The first is that it sounds quite complicated and might be complicated to administer. In fact, it follows simpler principles than company pension schemes. It might sound complicated when explained in one paragraph, but most pension arrangements cannot be easily explained in several technical volumes. It is certainly simpler than the current second state pension scheme. Secondly, carers, the disabled and so on might be left out. They would not pay national insurance contributions and so they would not get a state pension. If it is desired to fix this problem – and some might not see it as a problem – the solution is easy: the government just gives various groups credits for each year they are not working for a specific reason. It happens now and the system works.

Nobody has said how the Webb proposals will be financed. It bodes very badly indeed that abolishing winter fuel allowance, free bus travel and free TV licences has been ruled out. The way in which these benefits have become sacrosanct illustrates the problem of the citizens’ pension. Watch out for the following argument though. I suspect that Steve Webb will say that tax relief on private pensions is “unfair”. He will also argue that it is unnecessary if the state pension is not means tested – if people cannot become a burden on the taxpayer why, he will argue, should people be encouraged to make extra private provision? I suspect that pension tax relief will be abolished. In effect, by this “back door”, taxes will go up to finance a long-term increase in state pension provision.

The rumoured Webb model is a potential disaster. Instead of somebody’s pension entitlement being fixed at the point at which it is earned (and then being indexed to some pre-defined index) it is just decided by parliament. If parliament decides to increase pensions, it will increase all pensions to all old people. As the number of old people in the electorate grows, our democracy really will become like two wolves and a lamb deciding who eats whom for breakfast. Our younger generation is the lamb, of course. A pension based on a strengthened accruals principle deals with this problem. Secondly, a pension based on a contributory and accruals-based system allows a system of contracting out to be developed so that people can make alternative private provision and have a refund of national insurance contributions if they do so. Sadly contracting out has been brought into disrepute in the last 13 years but its scope should be extended and not reduced. Contracting out from a citizens’ pension is impossible. And here lies the clever political manoeuvring.

A citizens’ pension has long been a policy of the Social Democrat wing of the Liberal Democrats. They believe that pensions should be decided according to democratic vote using some notion of “fairness”. The genuinely liberal idea of people making private provision is anathema. Even Beveridge’s and Lloyd George’s contributory principle for the state pension scheme seems to be on its way out. Steve Webb is an expert in this subject. But he is also not a liberal. The liberals in the Conservative Party need to understand these complex issues so that they can suggest other, coherent approaches. They have handed pensions policy over to somebody from the left without proper scrutiny of his ideas. If these proposals are enacted, the younger generation had better start voting before their taxes rise and rise.

5 thoughts on “All liberals and Conservatives should reject Steve Webb’s pension proposals”

  1. Posted 27/10/2010 at 11:34 | Permalink

    A form of defined contribution is the way to avoid saddling future generations, and the proposal here (not Webb’s) appears to have some commonsensical ways to move from where we are (in an unfunded Ponzi) to a self-funding scheme.

    What would be a good test is if each contributor’s policy was run by a company of the contributors’ choice (with all the rights to move funds etc) and this may well expose the funding shortfalls as they occur instead of waiting 60, 70 years (like, er, now) and then finding out.

  2. Posted 27/10/2010 at 22:12 | Permalink

    Two points of detail.

    1. I understood that the savings from increasing the state pension age were to go towards reducing the government’s deficit. Using them to increase the amount of the state pension would seem to be double counting.

    2. Even if the so-called ‘universal’ nature of the welfare state requires everyone to receive a winter fuel allowance and a free bus pass, could these not be subjected to income tax? That would at least somewhat mitigate their provision for relatively wealthy pensioners. Or would that be administratively too difficult?

    I have just completed my own income tax return, and, as usual, I find it almost impossible to find my way through all the verbiage.

  3. Posted 28/10/2010 at 08:27 | Permalink

    Yes they could be subject to income tax though that would probably just emphasise how ludicrous they are! You would be paying income tax to finance the provision of a benefit to yourself on which you would then pay income tax! 1 is an interesting point not picked up in the media scramble to congratulate the coalition.

  4. Posted 28/10/2010 at 09:45 | Permalink

    I did see someone (I think it was a Labour party spokesperson) mention the point about double counting.

    I wonder what David Willetts thinks of this further burden on the younger members of the population?

  5. Posted 09/04/2011 at 12:16 | Permalink

    The proposal to leave existing pensiners out of the enhanced payment is nothing but blatant age discrimination. Kick the Conservatives and Libdems out. Mind you, Labour don’t care about the old, either

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