Richard Butcher argues against means-testing the state pension after the OECD called for the wealthiest pensioners to be excluded.
Isn't it odd that everyone gets the state pension? Whether you have a low income and few assets or a huge income and many assets, it is payable provided you have paid 30 years of national insurance (NI) contributions. It's so odd, in fact, that the Organisation for Economic Co-operation and Development (OECD) recently argued that the wealthiest 5%-10% of pensioners shouldn't get it and that the resultant saving should be redistributed to the poorer groups of pensioners. It's hard to dispute the principle of this when you consider both Richard Branson and Alan Sugar get the state pension.
Except, of course, it isn't as simple as all that. Here are some reasons for retaining the universal state pension.
Firstly, how do you define pensioner wealth? Is it income, is it capital or is it a bit of both? Do you pay it to a pensioner who has an income of £40k but has few other assets and rents a house and/or a pensioner with little or no other income but who happens to own an expensive house? You need to answer this question if you want to restrict the state pension.
When does low wealth (however defined) become high wealth? The OECD suggests the wealthiest 5%-10% should lose the state pension. They don't suggest the wealthiest 7.5%. In other words, they don't know the answer to this question. You need to if you want to restrict state pensions.
Also, if you can define a point at which low wealth becomes high wealth, do you have a cliff-edge loss of the state pension or is it a phased loss? If a phased loss, how will the phasing work? You need to answer these questions.
What happens when you have a two-person household and, in particular, where one of those in the household is still earning (perhaps modestly but above the wealthy pensioner band) and the other not. Do you assess joint wealth? What's your answer?
How do you justify it when someone has paid their 30 years of NI contributions? They have contributed the most but get the least - all because they were lucky or, more likely, have worked and saved hard and become relatively wealthy. How will you do that?
How do you avoid the risk of further gradual erosion? Once a "wealth point" has been identified, for example, what would stop future governments reducing it either explicitly or implicitly by not properly indexing it? As the former chairman of social administration at the London School of Economics Richard Titmus once said (more or less) "public services for the poor soon become poor public services". How would you avoid that?
Finally, even if you could answer all of the questions above, you would then need to create an infrastructure around them. You would need an administration function to test pensioner wealth from time to time and to ensure any phasing is accurate. This function would need to pay the correct state pension to the correct people at the correct time and it would have to deal with appeals and reviews for those who felt they weren't being treated accurately. This sort of function is not cheap - means-testing is not an inexpensive process.
The OECD is right to raise these sorts of questions and there is no doubt that there is poverty at the lower end of the pensioner wealth distribution that needs to be relieved. Means-testing the state pension, however, is not the way to do that.
Richard Butcher is managing director of PTL
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