Simplifying the state pension is largely a good thing. But its implications for government plans to means-test other pensioner benefits may only now be dawning on ministers
Like a particularly strange, obscure breed of nerds, those with an interest in pension policy found themselves glued to BBC Parliament on Monday as pensions minister Steve Webb finally stood up to announce the government’s White Paper on a single-tier state pension.
As expected, this will introduce more simplicity – a single-tier state pension set to be around £144 from April 2017 – with a bit of additional complexity in the short-term as the state second pension is wound up, and those who have opted out of it have to pay more in National Insurance Contributions.#
There are no immediate signs of the Opposition seeking to attack the reform; and, politically, it would be very difficult for the Labour party to be outflanked at the next election on the issue of the state pension.
This is why the betting money will be on this reform staying the course and being implemented on schedule in 2017, despite changes to NICs contributions that will hurt some groups of workers. Indeed, the general lack of understanding among the population as to whether or not they are winners or losers overall may be enough to stymie any serious opposition.
Among commentators, the biggest concerns have been raised about younger workers, some of whom will have to work longer and contribute more to get less, under the new regime. However, this is true of private pension saving as well as the state pension. What the single-tier state pension will do is provide certainty as to what they would receive if they were retiring today.
It also gives them confidence that their workplace pension saving via current auto-enrolment reforms will not just serve to disqualify them from means tested pension credit. The mantra that 'it must pay to save' is what has driven current DWP ministers to push this reform, together with awareness that, without it, they would be the politicians automatically enrolling thousands of workers into pension savings that they might be better off steering clear of.
For a reform of this magnitude, it will inevitably take time for different stakeholders to fully absorb the implications. For the debate on age-related public spending, these are particularly interesting. So here are a few comments.
First, the size of the future long-term care funding challenge in the UK, especially in England, has just got slightly smaller. In future, most older people in the care system will have more money in their pocket with which to fund their care. The Department of Health may now need to revisit some of its modelling around future demand and expenditure, particularly the modelling used to assemble the Dilnot Commission’s ‘capped cost’ model.
The bigger implication for long-term care funding debate is that the single-tier state pension will see much of the means testing infrastructure used to allocate pension credit unwound. Given the pension credit system still only reaches two-thirds of those it is meant to, few will miss it. The broader point is that as this means testing infrastructure prepares to exit the stage, it will be much harder to see how means testing of universal pensioner benefits could take place.
The proposal that the universal disability benefit for older people - Attendance Allowance - should be means tested (a central tenet of the Wanless Social Care Review and a feature of social care debate ever since) now looks like it has reached the end of the road. The prognosis of Attendance Allowance carrying on indefinitely looks much more likely.
But coming right up to date, proposals for means testing benefits such as winter fuel payments and free bus passes must also now be reconsidered in light of the fact that, by the end of the decade, there will be no means testing infrastructure in place to do this. Instead, debate is likely to focus on reforming these benefits versus scrapping them altogether. It will be an interesting one to which.
Yet for all of this, there is just one problem. It centres on this issue of whether individuals will be better off from pension saving – the central motivation for this historic reform. The core problem is this: individuals who do not expect to get on the housing ladder have a seriously large disincentive to engage in private pension saving - they will be disqualifying themselves from means tested housing benefit in retirement.
In fact, if you look at the average total amount that pensioners receive in housing benefit over their retirement, it exceeds the average amount many workers have in their pension pots at 65, especially the kind of low-earners who will be drawn into pension saving for the first time under ongoing workplace auto-enrolment reforms.
Unfortunately, projections are all pointing in the wrong direction on this. Housing economists now seriously suggest that in coming decades, rates of home-ownership could drop as low as 50% in the UK. The risk is that the improved incentives to save resulting from the single-tier state pension will be undermined by many more households being prevented from gaining a foot on the housing ladder by high prices and lack of supply.
When the DWP introduced their 2006 White Paper laying the ground for workplace pension reform, they knew housing benefit was a problem. In the time since, it has only grown.
What’s the solution? Well, having achieved what many thought was politically impossible at DWP, it may be time to consider sending Steve Webb across to DLCG to do something similar on house-building over there.
James Lloyd is director of the Strategic Society Centre.
