Increases in the pension age will save us billionsby David Willetts / March 26, 2015 / Leave a comment
Read Peter Kellner on “the truth about welfare”
Peter Kellner accurately shows that voters exaggerate how much is spent on benefits for people of working age and underestimate how much goes on benefits for pensioners. But behind this misconception there is more popular wisdom than he recognises. The point is obscured because Kellner uses the word “welfare” indiscriminately to describe all benefit payments. This is misleading. There is a big difference between means-tested benefits for people of working age and contributory social security benefits, mainly for pensioners.
There isn’t actually a national insurance fund, but that does not matter—it is a mutual insurance scheme into which we all contribute during our working lives and then draw on in old age, however long we live. It is a classic example of the state pooling risk for us. It is what the National Health Service does as well. This function is not to be confused with the very different role of redistribution from rich to poor which, however desirable, has never been as central to the role of the state as the left imagines.
William Beveridge, the architect of the modern welfare state, wanted social security benefits to be sufficiently generous to float people off means-tested assistance. It will be one of the historic achievements of the coalition government that our new higher value single pension finally delivers Beveridge’s goal. That improves incentives to save as you know that in your old age you will not lose benefits as a penalty for having saved.
Beveridge also extended contributory unemployment benefits. But benefits for people of working age who are not working are often non-contributory. Instead, such people depend on means-tested benefits because they have not been able to build up an entitlement by working beforehand. This is the tradition of national assistance, supplementary benefit and income support. It is welfare as distinct from social insurance. Means-tested assistance has always lacked the popular support commanded by contributory benefits.
The use of the term “welfare” to describe transfer payments originates in America. But when Americans talk about “welfare,” they mean non-contributory benefits, notably for lone parents. They emphatically do not mean social security, which is a completely different programme with a different rationale and run by a different agency.
The polling evidence is that young people are rather in favour of generous pensions for older people, which they see as money for their granny. They may also see this as a classic exchange across the generations, because the more support there is for pensions the more likely they are to enjoy such a pension themselves when they are old. In the wise words of the American economist Paul Samuelson, “giving goods to an older person is figuratively giving goods to yourself when old.” Young people are much tougher on benefits for people of working age because they think that, in general, these people should be working. So it is not simply a matter of the relative size of the two budgets—there are real differences in popular support which are captured in significant differences in language, not just here but across the western world. In saving money on means-tested assistance for people of working age, the coalition is accurately reflecting deep-seated popular attitudes.
“I always thought it was a bit ironic that while there was a lively debate about whether or not labour market protections for people of working age should be cut back, the coalition extended these protections to older workers with no controversy whatsoever.”
Kellner goes on to say that if substantial money has to be saved, it needs to come from pensioners. Here again we can make more progress if we make another important distinction—between retirement age and pension entitlement. Beveridge’s vision was that the state would insure you for loss of income as a result of unemployment, ill health or retirement. He set a retirement condition for receiving the pension and you used to lose some or all of your state pension if you were earning in your old age. But the Conservative government got rid of this so-called earnings rule in the 1980s and there is now no longer any requirement to be retired to get your pension. This boosted the incentives for pensioners to work. Retirement, however, still lived on as a concept in employment law—as an exemption from protections for unfair dismissal. Employers used to be able to get rid of an employee above a certain age without following the usual unfair dismissal procedures. But the first cohort of postwar baby boomers reached the age of 65 in 2010 and they were not putting up with such a lack of protection for their jobs. So the coalition abolished these exemptions from unfair dismissal protections and retirement age has almost entirely disappeared from labour law. I always thought it was a bit ironic that while there was a lively debate about whether or not labour market protections for people of working age should be cut back, the coalition extended these protections to older workers with no controversy whatsoever.
These changes have led to a surge in the number of working pensioners. The state pension age is completely divorced from any retirement condition. The evidence is that many people can and will want to keep on working long past pension age. In 2000, about half a million over-65s were working, 1.7 per cent of all workers. By the end of last year almost 1.2m over-65s were working, 3.6 per cent of all workers. The biggest surge in employment is among pensioners. Indeed I forecast that a growing issue over the next 10 years will be employers complaining about the big ex gratia payments they have to make to get older employees to leave their jobs. This trend has enabled the coalition to make one of it boldest reforms to pensions—raising the pension age much faster than planned by the previous government. The coalition has gone further and said that for every extra year of average life expectancy there should be four months of extra pension entitlement and eight months without. These increases in the pension age are estimated to save £500bn over the next 50 years. One possibility would have been to go even further and set a formula in which you were guaranteed a pension for a fixed period up to average life expectancy. You could call it “RIP-X.”
So we are saving money, but are doing so in a way that goes with the grain of popular attitudes. And we are saving money from pensioners, not by cutting their benefits but by raising the pension age.