UK - Shadow UK pensions minister David Willetts has outlined a sketchy proposal to restore the link between earnings and state pensions.
At the recent Conservative Party conference in Blackpool, shadow work and pensions minister David Willetts proposed abolishing the state second pension (S2P) and raising the value of the basic state pension by restoring its link with earnings, something removed by Margaret Thatcher’s government.
The party said this would increase a single person's basic state pension by £7 and add £11 to a couple's basic state pension, and a million pensioners would be taken off means-tested benefits by 2006.
If earnings grew 2% more than prices, in the first year Willetts estimates restoring the link with earnings would cost £510m. This would be financed by an offset in means-tested benefits of £180m, a reduction in new Pension Credit claims of £25m, and higher tax revenues of £50m.
This would give a net £255m cost of restoring the link. However, Willetts somewhat breezily estimated he would also make savings of £700m in the first year from reform of the UK’s £127bn social security budget, £800m the year after, £900m the next year, plus £1bn in year four. Over four years the cost would “lie somewhere between a saving of £720m and a cost of £180m.”
Responding to the Tory plans to restore the state pensions earnings link, work and pensions secretary Andrew Smith said: Linking the basic state pension to earnings is unsustainable in the long term. The Tories’ numbers just do not add up. Their proposals also do nothing to help the poorest pensioners.”
The former treasury official also proposed doing away with the contracted-out rebate, a device worth £11bn a year used to compensate companies for the cost of providing their staff with a pension. Instead he said government would match by “a few hundred pounds” individual contributions to a personal pension or company scheme. But he admitted he had yet to consult industry on the proposal.
However, Peter Thompson, worldwide partner at Mercer, said: “Few would argue that state pensions are in a mess. A major shake up of the present system is what is needed, but the present government has shied away from this. The opposition's proposals are refreshingly radical, though we'd need to see the detail of what's on the table.”
But the policies seem a watered down version of the Tories’ previous Fully Funded Pension idea, which would have allowed people to opt out of contributing to the state pot altogether and instead divert all the money to private retirement savings.
The impact on the state PAYG system was to have been financed in the short term by a surplus in the National Insurance account. Willetts said the Tories’ focus was now instead to reduce means-testing.
But consultant Gissings said that the government and opposition parties should stop interfering in pensions in the UK and adopt policies that will restore faith in pension provision, before it is too late.
Gissings said it agreed with Tory proposals to scrap the minimum income guarantee for retirees and S2P and improve the basic old age pension, “to give some certainty over what can really be expected from the state as a base retirement income for all, subject to a clear signal that existing rights under SERPS/S2P will be honoured.” Willetts later said that existing rights would be honoured.
Willetts, nicknamed ‘Two Brains’, recently drew flak when his advice that women should be breeding more to solve the demographic problem of an ageing society was branded as fascist.
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