Prof Philip Booth takes a look in a new IEA paper at changes to the state pensions and elderly benefits
In Sharing the burden – How the older generation should suffer its share of the cuts the IEA looks at the savings that would be made if non-means-tested benefits to older people were cut and the state pension system were reformed.
Older people enjoy a privileged position at present. The non-means-tested benefits they receive have not been removed or reduced and the basic state pension is planned to increase above inflation. They also receive particularly favourable treatment in the tax system, with higher personal allowances than younger people and even a marriage allowance if one partner is over 75.
This group has received special treatment by the government in its spending review – it has been left more or less exempt from spending cuts. At the same time younger people have felt the cuts through changes such as in tuition fees and child benefit.
Commenting on the report, one of its authors, Philip Booth, Editorial Director at the Institute of Economic Affairs said:
“The reality is that the government’s cuts announced so far only take public spending in real terms back to 2008 levels. By including older people in the cuts an additional £16bn a year could be saved. The government has imposed many new burdens on the younger generation in how it has chosen to cut and where it has chosen to raise taxes. They have let older people remain largely insulated from much of the cuts. It’s time this changed.
“These proposals should be part of a more radical review of government spending than the one on which the government has embarked. It should be stressed that this review would lead to huge tax decreases – including tax decreases that would benefit the old, such as a large cut in VAT.”
This paper proposes that by abolishing a number of non-means-tested benefits and by reforming the state pension system the government could save an additional £16bn per annum by 2015/2016:
- Abolition of free bus travel – £1.3bn
- Abolition of free TV licences – £0.7bn
- Abolition of winter fuel allowance – £2.1bn.
- Not using the “triple lock” for pension increases from 2011 – £5.6bn
- Increasing the minimum income guarantee for pensioners in line with the higher of the rise in prices (RPI) or 2.5%, not earnings – £0.8bn
- Raising the state pension age to 66 in 2015 – £5bn
In many cases these areas just represent fiscal churning whereby pensioners are paying taxes and receiving benefits at the same time.
State pension reform
This paper also considers how a sustainable state pension system could be built by:
- Introducing an accruals-based system – Future state pension accrual should be based on a contributory principle accruing 1/45th of a full state pension for each year of work.
- Raising the retirement age – The government is going to raise the retirement age to 68, but not until 2046. This paper suggests rapid increases in state pension age with the pension age increasing over time in line with life expectancy.
- Introduction of rebates – Individuals would be able to contract out of the scheme, receiving a rebate of their National insurance contributions to invest in a private pension scheme.
This proposal is in the opposite direction to the government’s plans which seem to be ignoring the problems caused by demographic trends.
Public Sector Pensions Reform
Currently, the cost of public sector provision is about 40% of the public sector salary bill – though it varies widely between different parts of the public sector. However, because of the way in which the government accounts for public sector pensions, only about half that figure appears in headline public spending numbers. This paper proposes that all public sector budgets are adjusted so that they contain an allowance for current salaries plus an allowance of 20% of salary for pension provision. It would then be a matter for public sector employers (schools, hospitals or health authorities, the Ministry of Defence and so on) to agree pension arrangements with their employees. If pension arrangements cost more than 20% of salaries, cuts would have to be made elsewhere; if pension arrangements cost less, there would be scope for salary increases.
This change to public sector pension arrangements would not change headline spending at all. The reason for this is that about half of public sector pension costs are currently hidden from government accounts. This policy change will, however, reduce underlying public spending on public sector pensions by £17bn to £18bn a year.
Notes to Editors
The full report Sharing the burden – How the older generation should suffer its share of the cuts by Philip Booth and Corin Taylor is attached and can be downloaded here.
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk management at Cass Business School.
Corin Taylor was formerly a Senior Policy Adviser at the Institute of Directors, covering economic policy, public sector pensions and public service reform issues.
To arrange an interview with Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, please contact Stephanie Lis, Communications Manager, 077 5171 7781, 020 7799 8900, [email protected].
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
This paper is part of a project on major reductions in public spending which will culminate in a publication in the early summer, covering most departments of government.