An actuarial professor has advocated means testing as a a way of keeping the state pension age at 65 for both men and women.
In 'Surfing the Tsunami: A plan for state pension reform', Paul Sweeting, Professor of Actuarial Science at Kent University, said this could be done by setting a limit for means-testing at the income level for higher rate (40 per cent) tax — currently £45,000 a year.
It would need to start in 2019, when the next rise in the state pension age is due to occur.
In that year, anyone earning enough to pay higher rate tax would give up £1 of their basic state pension or new state pension for every £10 income received in the higher tax band.
Professor Sweeting said: "This would keep the per-worker cost of the state pension at about the same level as if the rise in SPA had occurred, even though the number of workers — defined as those between 16 and SPA, and not in fultime education — would be smaller, due to the lower state pension age.
He admits "Means-testing is controversial. On the one hand, it can be used to ensure that resources are targeted at those that need them most."
According to the report, a means tested benefit can require more administration than the universal alternative.
Whether this is an issue or not depends on the potential saving compared to the cost of administration — and for a benefit such as this, administration will not be the defining criterion.
However, the main issue that many people have with means-testing is that it encourages moral hazard, Professor Sweeting stated.
This problem was recognised when the old age pension was introduced in 1909. In that instance, the pension could be withheld if someone tried to become eligible through “self-impoverishment”.
But the extent to which moral hazard is a problem depends on the “rate” of means-testing.
For example, if £1 of benefit is lost for every £1 of additional income received above a certain level, then the risk of moral hazard is high. This is means-testing at its highest rate.
"Would the same level of moral hazard exist if £1 of benefit were lost for every £10 of additional income received? Or £20? Probably not," Professor Sweeting said.
"There would be an incentive for people to transform income into capital gains to avoid the means test — this would have to be guarded against.
"And as the rate of means-testing increased, there would be less of an incentive to save for retirement.
"This might mean introducing compulsion to retirement saving. This could be needed anyway, given the state of the UK pensions system— but that is another story…"
However Steve Webb, director of policy at Royal London and former pensions minister, blasted Professor Sweetings' proposals.
"After a lifetime of paying National Insurance Contributions, often based on a relatively high wage, it would be totally unacceptable to move the goalposts in retirement and remove state pensions from higher earners," he said.
"The tax system means that those with higher incomes effectively lose 40 per cent or 45 per cent of their state pension in tax.
"Once the principle is accepted that the state pension should be means-tested, it is likely that more and more people will be drawn into the scope of that means-test, with potentially devastating effects on the incentive for those on more modest incomes to save for their retirement."
