Scrap the winter fuel allowance

Ed Miliband, Nick Clegg and Iain Duncan Smith are right to question the future of the universal benefits for older people. The government spends more on welfare than on anything else and it is simply not possible to fix the public finances without getting the welfare budget under control. Yet until now there has been a major blind spot in the government’s plans. The prime minister has continued to rule out saving money in the largest part of the welfare budget—that relating to pensioner benefits.

Take the winter fuel allowance. These payments are expensive—with an annual cost of £2.1bn—and do little for vulnerable pensioners. A parliamentary committee showed in 2009 that almost 90 per cent of these payments go to pensioners who are not in fuel poverty. Institute for Fiscal Studies research has found that 40 per cent of the payments are spent on fuel costs. So not only do most of the payments go to people who do not need them, but the money is mostly spent on things other than fuel.

The government also spends around £1bn a year on free bus passes and £0.5bn on free TV licenses. Research on bus passes shows that this spending goes to relatively wealthy and younger pensioners, who often have other means of travelling. It does little for increasing social inclusion among pensioners, as the main barrier to travel is poor facilities at bus stops, not the cost of a ticket.

The problem is that these benefits go to all pensioners, irrespective of need. This means resources have to be spread thinly and less is available for the most vulnerable pensioners. There are better and less costly ways of helping the most vulnerable, such as the existing system of cold weather payments.

Many argue that pensioner benefits are different from other forms of welfare, as retired people have made national insurance contributions and paid taxes during their working lives. But this does not give them an unlimited claim on government funds. Contributions have largely been spent as they came in. Indeed, current retirees have done well out of the welfare state, as governments have consistently spent more than they collected since the 1970s.

Government accounts are already under pressure and in the longer term it is hard to see this pressure letting up. To illustrate the changes taking place, in 1952 the Queen issued 257 congratulatory messages to people reaching their 100th birthday. This figure had increased to 9,736 by 2011 and is set to keep growing. 10m people alive in the UK today are expected to reach 100 years of age.

In many ways, these demographic changes are a good thing. People who enter retirement now tend to be healthier, wealthier and more active than previous generations of retirees. Yet an ageing population creates challenges too. As people live longer, 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. Unless the government reforms the welfare state, the long-term outlook for the public finances is even bleaker than today’s.

Getting to grips with the UK’s deficit and debt requires hard decisions. Public sector workers’ pay has been frozen, housing benefit and benefits for the unemployed have been capped, the VAT increase has made shopping more expensive and university students face higher tuition fees. The government must now call time on the winter fuel allowance.