Pensions reform ‘will overburden benefits budget’

26 May 10
The government’s proposed changes to state pensions could significantly reduce benefits for working-age people, Public Finance understands

By Jaimie Kaffash

26 May 2010

The government’s proposed changes to state pensions could significantly reduce benefits for working-age people, Public Finance understands.

The Queen’s Speech confirmed the Liberal Democrats’ ‘triple guarantee’ that the basic state pension for individuals will increase in line with earnings, prices or 2.5% – whichever is greater – as part of the Pensions and Savings Bill. The Department for Work & Pensions estimated that this would cost £300m on top of what is already being paid out in state pensions. The Conservative-LibDem coalition is to review the retirement age as part of the Bill.  

However, welfare groups and economists are warning that, although pension reform is beneficial in the long term, it could have immediate consequences for working-age benefit claimants.

The Institute for Fiscal Studies has estimated that £12bn would have to be cut from social security spending to reduce the deficit. Further details of social security spending cuts are expected in the emergency Budget on June 22 and the Spending Review in the autumn.

The Labour government legislated to link state pensions to earnings in the 2007 Pensions Act. This also would have increased the overall pensions bill but not by as much as the ‘triple guarantee’.

Gemma Tetlow, senior research economist at the IFS, told Public Finance that the Pensions Act was passed ‘before the financial crisis hit’.  She said: ‘It was intended to be a long-term sustainable settlement under a different set of fiscal circumstances. All three parties stuck with the commitment in their manifestos, which was interesting as it does increase demands on spending when they are looking to cut.

‘If the government did not want to cut pension spending, it would have to find cuts elsewhere in the welfare budget.’

Helen Barnard, programme manager at the Joseph Rowntree Foundation, warned that reducing benefits for working-age people would hit the most vulnerable the hardest. 

‘If they are going to really cut benefits and increase pensions, that implies something massive for those people reliant on benefits,’ she told PF.

‘Benefits are already incredibly low – even if you add all the benefits an adult of working age is entitled to, they only reach 40% of minimum standards of living that our research shows are socially acceptable… Pensioners who claim all their entitlement meet the minimum income standards.

‘The idea that benefits for adults out of work could be decreased any more is very worrying both in terms of helping them to survive and child poverty. If benefits start being cut, child poverty will go up. This has big implications for our future.’

Stephen Overell, associate director of the Work Foundation, warned that the appointment of Iain Duncan Smith as work and pensions secretary and the approach to former Labour welfare minister Frank Field to become ‘poverty czar’ had worrying implications for the benefits system. 

‘They have both been very outspoken on the subject of reforming benefits. We are very nervous about some of the things they have said, not least the emphasis on cutting benefits to drive people into work,’ he told PF.

A DWP spokesman said the pensions commitment had been considered ‘in the context of spending across government and we believe it is affordable’.

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