Ed Balls is right on pensions

Ed Balls is right to argue that no sensible plan for rescuing the public finances can fail to look at pensioner benefits. Over the last three years the amount that government departments spend has shrunk on average by 8 per cent while the amount going on “annually managed expenditure,” which includes welfare benefits, has grown by 25 per cent. Benefits to pensioners account for around 55 per cent of welfare spending and 16 per cent of all government spending.

The need to look at pensioner benefits is about much more than the government’s short-term money problems. This reflects fundamental changes taking place in society, especially the ageing of the population. Not only are the baby boomers (people born between 1946 and 1964) starting to retire in large numbers but fertility rates are falling and people are living longer. Indeed, as Reform has estimated, a person retiring in 2010 would have a one in six chance of spending three decades in retirement; by 2035 this will increase so a quarter of people retiring can expect at least 30 years of retirement under current plans for the state pension age.

Of course many of these demographic changes are good news. But it would be irresponsible to fail to consider their fiscal implications. With an older population, many of the existing features of the welfare state are going to become more expensive. This will happen while the share of the population who work and fund these programmes shrinks. The result is that without reform to the welfare state the long-term outlook for the public finances is even bleaker than today’s.

This means the welfare state needs nothing less than a revolution. The retirement age will need to rise further and faster than planned. But this is not all. People will have to save more for their retirement, make greater use of private health insurance and consider drawing down the equity in their homes to fund services like long-term care. Governments will have to scrap poor value for money benefits like the winter fuel allowance, free bus passes and TV licences, and the triple lock and expensive system of tax relief for pensions will both need review.

There is no doubt that politically this is a difficult path to follow. There is a saying that “elections are determined by the people who show up,” and every year the people showing up are getting older. In the 2010 election, 77 per cent of eligible people aged 65 and older voted—well above the 65 per cent turnout for the population as a whole. The fast growth in the number of people aged over 65 means that if this turnout continues in the 2015 election, one in four voters will be 65 or older. This will increase in every successive election to reach one in three by 2050.

David Cameron’s government has run scared of this elderly voting bloc and ducked the issue of affordability. The single-tier pension will not save money until the 2040s, although national insurance contributions will be higher. Indeed, the system as a whole has been made more expensive by promising that pensions will increase over time according to the triple lock. The Prime Minister continues to rule out cuts to poor value for money spending such as the winter fuel payment, free bus passes and TV licenses.

Whoever wins the 2015 general election will have to make tough decisions on the welfare state. On this Ed Balls has thrown down the gauntlet to George Osborne. He has accepted the case for means-testing the winter fuel payment and recognised that the plans for increasing the retirement age do not go far enough. In his review of public spending, due on 26th June, George Osborne must now explain how he will put pension spending onto a more affordable footing. If he fails to do this, he will weaken his claim to be presenting a credible position on public spending.