Should pensioner benefits be means tested?


It’s a maxim of politics that you mess with the grey vote at your peril.  Britain’s pensioners tend to vote in greater numbers than their children or grandchildren.  A switch in their opinion could easily determine an election.  But several of my Liberal Democrat colleagues are beginning to challenge this psephological wisdom by suggesting that the elderly may see some of their state benefits curtailed, at least for well off pensioners.

Deputy PM Nick Clegg has mused about the fairness of government action to cut the deficit, pointing out that so far the young and those of working age have suffered the brunt of tax rises and expenditure cuts.  Yesterday, former Care Minister Paul Burstow published a Centre Forum pamphlet ( http://www.centreforum.org/assets/pubs/delivering-dilnot.pdf ) advocating means testing of the winter fuel allowance to help cover the costs of a reform of social care funding.  To my mind, dealing with the demographic time bomb of families struggling with the costs of caring for the elderly is the biggest domestic policy challenge facing my generation of politicians. So I welcome Paul’s idea and hope it provokes a big debate.

Nick and Paul have brought together two issues.  In the short term, how can we balance the nation’s books with everyone paying a fair share? And in the medium term, how on earth do we cover rising care costs?  Here’s my take on some of  the principles and practicalities of disturbing the current financial settlement for pensioners.

Is it true that pensioners have escaped much of the government’s austerity policies?  On the face of it, yes.  The Coalition has implemented the Lib Dem policy of triple guarantee that the state pension will always increase by a minimum of 2.5% or inflation or average wage increases if they are higher.  So last year the state pension was increased by the largest amount in its history.  The winter fuel allowance has been maintained for all pensioners, at the same flat rate of £200 or £300 for those in their eighties.  The free bus pass has been kept as have free TV licences for those aged 75 and over. Pensioners with little or no income beyond the state pension get top up payments of pension credit.  This is not just useful extra money it’s also a passport to automatic council tax benefit, cold weather payments, free prescriptions and eye and dental checks.

Compare the above to public sector pay freezes for the last two years and a capped increase of 1% over the next few years.  Or the withdrawal of EMA from many college students and the increase in tuition fees, albeit with a much fairer repayment scheme.  Or the freezing of child benefit and now capping the increase to 1% and withdrawing it from high earning families.  It’s quite a stark contrast.

What about the tax system?  Pensioners have for many years had a much higher tax free income personal allowance than those of working age.  The personal allowance for pensioners in the current tax year is £10,500 compared with £8,105 for everyone else.  The working age allowance is of course only as high as £8,105 due to the Lib Dem policy of raising it to £10,000 in this Parliament, compared to £6,475 at the start. The Coalition has now decided to freeze the pensioners allowance until the working age allowance catches up, which is likely in 2015.  Labour have dubbed this temporary freeze a “granny tax”, which conveniently ignores the fact that the majority of pensioners are completely shielded from tax and none pay national insurance.

These anomalies have built up over many decades.  When you factor in other societal changes such as access to good occupational pensions there is a clear problem of inter-generational unfairness.  This issue is receiving more attention from think tanks and more thoughtful politicians. The huge future cost of dealing with care for the elderly could tip the financial balance even more against the young and those of working age in general.

I don’t think there are any simple trade offs here, in taking away a pensioner benefit and giving it to the young.  But it is silly to pretend that pensioners are all the same.  I would not for one moment want to take away or reduce benefits to the poorest pensioners.  But is a hallmark of a progressive society to give a £300 winter fuel allowance both to an 80 year old in a one bed flat in Bristol and also give it to the Duke of Beaufort, our nearest grandee with rather a lot of rooms to heat at Badminton House?

So what are the options, at least to reduce the benefits bill for richer pensioners?  First, there is a choice between means testing and taxing.  There is some means testing in the system already, to give a minimum income to the poorest pensioners.  But that affects a minority and I hope that we will move towards a good basic pension for all that will do away with means testing the poorest.  Steve Webb has long advocated this and the party will want him to move onto this area when he has completed other reforms as Pensions Minister. I think the tax system is a better option.  All pensioners with high incomes will already be within the HMRC net.  Making a cash benefit taxable could claw back at least 40% (0r 45% for the really well off) from higher rate taxpayers.  The tax return could also be used for a steeper withdrawal than the tax rate, as is being introduced for child benefit.

Making pensioner benefits taxable is easier for some than others.  The winter fuel allowance and TV licence are easy to value but what about a bus pass?  The bus pass also brings with it wider societal benefits. It makes it easier for pensioners to travel to medical appointments, or visiting family and friends.  Those that have cars can reduce their use, good for the environment.  Personally, I think the pensioner bus pass is good for social cohesion and I would leave it alone.  Inter-generational unfairness here would be better dealt with by giving a bus pass to post 16 college students.

So I think there is more scope for using the tax system to remove benefits from the richer pensioners.  This would release money either for care costs or for extra support for the young.  But I don’t want to get into a situation where the parties try and badge themselves as for the young or the old.  We know that pensioners are more likely to vote Tory but the overall greater propensity to vote means that their votes are significant in Lib Dem target seats too.  Besides, neither the old or the young look just to their own selfish interests. I know from Bristol West that students have always judged policies and parties in the round and don’t look exclusively at higher education funding when deciding how to vote. Students also have grandparents and would quickly see through any attempt to rob one section of society in order to appeal to another.

The debate about inter-generational funding is at early stages.  It needs to get more urgent.


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