How to Reform the State Pension

It might have escaped your notice but we’re in the middle of a General Election here in the UK. This means that the public is now being subjected to a barrage of tedious speeches peppered with policy proposals which leave a lot to be desired. At time of writing we’ve already seen Rishi Sunak announce as part of his war on young people a plan to bring back a form of National Service while also offering yet another bung for boomers. Given that the Tories are almost certain to get booted out these are unlikely to ever materialise. However, I did so happen to write about both these things for this very blog some time ago which you can read here and here.

As we’re probably one step away from Sunak announcing that he’ll bring back hanging while the other parties also try to outcompete each other byo offering red meat to the over 60s, I thought I’d get in on the action of slightly ‘out there’ policy proposals which is the bread & butter of this blog.

A few months ago I wrote a post on how we should tackle intergenerational inequality. Young people have it tough in the UK whereas pensioners have it relatively easy. You can read it here but I essentially argued for introducing a stipend for young people - essentially it would be a monthly direct cash transfer to everyone under 35.

Such a move would be the right thing to do but is only half of the story. If we want to make the country fairer then we also need to look at reforming the State Pension.

It is right that as a society we provide a safety net for people who for whatever reason cannot work and this includes pensioners. What is more, while it is true that a quarter of pensioners are millionaires and a large proportion are well off, the UK still has a significant proportion of pensioners living in poverty and we have some of the least generous welfare provision for pensioners in Europe.

While all of that is true, the State Pension is a benefit and is incredibly expensive. It is also unfair and unsustainable. An ageing population means that working people are forced to pay higher taxes in order to fund the incomes of pensioners which are triple locked (there may be additional locks proposed by July). Here is how we can fix things.

Introduce means testing

This is likely to anger the most people given the entitlement culture of many older people who erroneously believe that they are simply getting back the money they paid in when they worked. You will often hear talk of people ‘having paid in all their lives’ in National Insurance Contributions. In reality their NICs went to fund the State Pensions of their own parents and grandparents in the same way as today. Nobody earns their State Pension, it is a benefit just like any other such as Universal Credit.

Given that it is a benefit and also incredibly expensive, it should be treated as such. This should involve a form of means testing. This would work as you’d expect: if your savings, investments, and other pensions are above a certain threshold then you will not be eligible for the State Pension. Of course if a pensioner was to see a drastic change in their circumstances then they would of course be allowed to apply for the State Pension so they would not be left destitute.

A potential criticism of this is that it might disincentivise saving on the part of people so that they would be able to claim the State Pension. However, a properly designed system which would involve a form of taper should mean that the policy would not be too distortionary.

Abolish the triple lock

It is right that vulnerable people don’t see a real term pay cut. Unfortunately, this is not guaranteed for most people in the country. Working people have seen their earnings and savings eroded by high inflation while those in receipt of Universal Credit have had their benefits uprated in line with inflation but this was not guaranteed.

Rather than a guarantee of whichever is highest out of 2.5 per cent, inflation, or earning there should be a single lock. The State Pension should be guaranteed to rise in line with inflation only and this should be the guarantee for all other benefits as well. Of course if there is a significant increase in the cost of living then additional payments should be made but, for the most part, the only guarantee should be that the State Pension only increases in line with inflation.

Such a move would ensure that pensioners are protected from price rises and so don’t see their standard of living decline. It will also bring it in line with other benefits and the experience of working people.

Change the State Pension Age

I have a lot of sympathy for calls to raise the State Pension Age. The argument is understandable - thankfully people are living longer and so it is not sustainable for the State to fund a retirement of potentially over 30 years.

However, this is only part of the story. Due to health inequalities and the nature of work undertaken by some people they either die before they reach the current State Pension age or are signed off work and end up relying on the welfare system in some other form as well as increasing the burden on the NHS.

My proposal is therefore to raise the State Pension age for people who have spent most of their career in a services role while lowering the age for people working in manual labour type roles.

I fully appreciate that this would be the most difficult aspect to administer and to get right. An objection would be that people might suddenly switch from one form of work to another in order to retire early but I think such a situation is highly unlikely to happen and there could be safeguards built in to prevent this.

So, there we have it. No system would be perfect and there would be cost associated with administering this new system but I believe it would be a fairer and more sustainable way to provide support for people in their old age.

Other stuff

I’ve been resting and also cracking on with this book but have done some other writing. The other week I wrote the piece I seem to write every six weeks or so for the Evening Standard on why the Monetary Policy Committee of the Bank of England has failed. You can read it here. I also wrote for the Standard this week on what a more mature trade policy should look like.

I imagine we’ll be treated to lots of policy announcements in the coming weeks and so if I find the time I shall be sure to mouth off about them.

As ever, thanks for reading and for getting in touch. If you like my writing then feel free to bung me some dosh here: https://buymeacoffee.com/opportunitylost