In a hearing yesterday (November 27) in front of the select committee on Intergenerational Fairness at the House of Lords, Sir John Hills, Richard Titmuss professor of social policy at the London School of Economics, said the current system was no longer equitable and needed reform.
He said: "There was a logic to the system when most pensioners were poor, and when the aim of the system was to be symbol of what we pay in [during] our working lives and tend to receive [in] benefits after retirement."
But he said "major problems could be faced with the escalating future cost of healthcare and in particularly social care".
He noted today not all pensioners were poor, and medium pensioners had incomes similar to the younger people, with most of their income derived from defined benefit pensions which were highly tax privileged as they were accumulated.
He said: "It seems to me this is a moment when one could couple a tax on people that have the ability to pay with the need to fund their social care, which could reduce the gamble whether it is their family that will be losing a large part of their inheritance."
Sir John added, however, he was not in favour of a full rate of national insurance contributions (NIC) for the working pensioners, but something closer to the German model of a lower level on the people that can afford it above a threshold.
Research published in May by the Resolution Foundation Intergenerational Commission called for pensioners who are still working to continue to make national insurance contributions, in order to fund a £2.3bn NHS deficit.
According to research from Royal London, more than a quarter of taxpaying pensioners are still in paid work – 1.5 million have employment income and 0.5 million have income from self-employment.
Carys Roberts, senior economist at the Institute for Public Policy Research (IPPR) said the body supported a reform on national insurance contributions, "making it more progressive for working age people as well as for those above state pension age".
She said: "There is a role for people over state pension age to pay a reduced rate or indeed the full rate on employment income, which could raise just about £1bn in 2020/21."
On the other hand, Warwick Lightfoot, head of economics and social policy at think tank Policy Exchange, argued that extending national insurance to working pensioners would undermine its contributory principle – currently individuals have to pay national insurance for 35 years to be eligible for the full state pension.
He said: "If we want to maintain that, it doesn’t make sense to apply it after someone isn’t accumulating any more once they reach state pension age."
Mr Lightfoot also shared the view presented by HM Treasury at a previous hearing that the current exemption was a strong incentive to encourage more people to stay in work for longer.
He said: "When people have looked at things that interfere with work incentives, payroll social security taxes are generally perceived within the [Organisation for Economic Co-operation and Development] OECD as something which is a disincentive to participate in the labour market."
But Sir John said this was an empirical question, which he would like to see some evidence of.
He said: "We know the people who keep working past state pension age tend to be higher paid, they tend to have rewarding jobs, and I suspect the marginal effect would be small."
maria.espadinha@ft.com
