By Andy Mullineux, Emeritus Professor of Financial Economics, Centre for Responsible Business and CHASM
The UK scheme is not generous when compared to international peers, indeed rather the reverse, but it does have a safety net for those most heavily reliant upon it.
The UK’s ‘triple lock’ state pension scheme was designed to ensure pension increases do not fall behind average earnings increases, or get eroded by inflation, and rise in real terms in order to reduce pensioner poverty. The protection is needed because many pensioners have little or no opportunity to compensate for real or relative income falls. Workers can seek overtime, or extra work opportunities, whilst pensioners may not be ready or able to seek employment (and those that are, are often frustrated by ageism); and tend to become less able to do so the longer they have been retired.
The UK State Pension can be viewed as a ‘universal basic income’ for people old enough to qualify for it, having made national insurance (NI) contributions for at least ten years. Those with 35 years worth of contributions qualify for the full state pension. The employees’ NI contributions are a percentage of income and thus a supplementary income tax, whilst employers’ contributions are an employment tax. The revenues raised go to HM Treasury, rather than being invested in the state pension scheme, as in a number of other countries. Because it operates as a ‘pay as you go’ scheme, rather than a funded scheme; as the population ages, the cost of providing the pensions grows over time if the benefits are maintained. Allowing payments to dwindle in real (after inflation) and relative (to earnings) terms risks increasing absolute and relative pensioner poverty.
The UK scheme is not generous when compared to international peers, indeed rather the reverse, but it does have a safety net for those most heavily reliant upon it. Pension Credit raises the weekly income of individuals to just over £200 a week (about the same as the full state pension rate), and couples to just over £300 a week. Beyond this, the safety net is underpinned by Universal Credit and a Pensioners’ Fuel Allowance, to stave off fuel poverty.
Those that supposedly do not ‘need’ the state pension will most likely be paying tax on their non-state pension income. This may well exceed the state pension income for those more generously provided for, who are likely to have also made larger, income related, NI contributions.
Because intergenerational unfairness is compounded by the ageing of the population, requiring and encouraging those able to do so to work longer will help reduce its effect. Ageing also increases demands on the NHS and for social care, especially from those beyond work; for which taxes must be raised, from a (relatively) shrinking working population, to cover the costs.
Short of euthanasia by stealth, through allowing (absolute) pensioner poverty levels to increase, a thorough overhaul of tax allowances for pensions saving and pension income taxation, considering the current general under-provision for pensions for younger (than ‘baby boomer’) generations, is required. Consideration should also be given to building a state pension fund, from hypothecated worker and employee NI contributions set at appropriate levels. Further, the safety net for those reliant on state pensions needs to be enhanced sufficiently to enable the reduction of pensioners poverty in the years since the introduction of the ‘triple lock’ in 2010 to continue. The National Employment Savings Trust (NEST) already provides a regulated auto-enrolment funded scheme for employees of small and medium sized companies.
In addition to affordable schemes to encourage pensions saving, fair treatment of the younger generations also urgently requires prompt action to tackle the shortage of good, but affordable, living accommodation to buy or rent.
Finally, the alleged ‘non-sustainability’ of the current ‘triple lock’ UK state pension scheme should give pause for thought to proponents of a broader UK ‘universal basic income’ scheme and raises again the broader issue of universal, versus means tested, entitlements. Contributions to National Insurance were made compulsory in 1946 to fund national schemes for health insurance (the NHS), unemployment insurance, maternity allowance, child benefit and the state pension inter alia. Should entitlements now be means tested, and if so, should contributions still be compulsory?
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.