Personal Pension 

IEA calls for means-testing of ‘unaffordable’ state pension

Current state pension policy is “unaffordable” and “irresponsible”, according to right-leaning think-tank the Institute of Economic Affairs, which has published a paper calling for a radical overhaul of the rules to make the basic provision from the state means-tested.

In a discussion paper published today (8 January), IEA advocates a move to the Australian model that would see private pension saving made compulsory, retirement age increases accelerated and state provision scaled back to only cater for those in hardship.

It warns that while the government’s reforms to state pension are a move in the right direction, they should go further as it is unaffordable in its current shape. According to IEA, the cost of the state pension will rise by 2.4 percentage points of GDP between 2012 and 2062 – an increase of 42 per cent as a proportion of national income.

In 1992, the Australian Labour government introduced compulsory private DC pension contribution that demands people work until much later in life to compensate for demographic shifts caused by rising longevity. It will eventually move towards a means-tested benefit.

The paper says: “Since public pension schemes crowd out personal savings and also produce incentives to retire earlier, it would be highly advantageous to move towards a privatised pension system in which citizens are given more responsibility to save for their own retirement.

“This means that any payments from the government to people at older ages would be means-tested.”

IEA proposes that from November 2018, the state pension age for men and women should be increased by two months every quarter, thus raising state pension age to 68 by January 2013, and from January 2023 state pension should be linked directly to increases in life expectation.

As part of the overhaul, IEA suggests “labour taxes” - National Insurance - should be ceased much earlier at a point when an individual has paid in enough to provide for a state pension should they require it.

The share of older people as a percentage of the entire UK population has increased and is projected to do so even more rapidly in the future. In 2040, for example, the IEA estimated that 29 per cent of the population will be aged 60 or older, up from 23 per cent in 2012.

Yet these demographic changes have not been accompanied by an increase in the labour force among the elderly which would be necessary to keep the burden of state pension schemes stable, it argues.

To combat this, the IEA recommends that policymakers should remove general obstacles in employment to old age, including employment protection laws. It says it would be “beneficial” if the government creates a pilot scheme in which some firms are exempt from age discrimination laws.

The paper added that this would be advantageous tax reasons from employing individuals at older ages as neither employees nor employers pay national insurance contributions once an employee has reached state pension age.