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A consumer&#39s view

As the pension crisis deepens, two new reports – from the Association of Consulting Actuaries and the National Consumer Council – are very critical of the Government&#39s proposals contained in the Pensions Green Paper.

Both reports come to the same conclusion – that the proposals do little to reduce the complexity of pensions and that they do nothing to relieve poverty in retirement or to encourage those who can afford to do so to save.

Both the NCC and the ACA call for an increase in the basic state pension and the re-establishment of the link to earnings rather than inflation. The problem with this is that increasing the basic state retirement pension across the board is very expensive.

To raise the state pension by £1,000 a year or £20 a week – not enough to make much difference to those at the bottom end of the income scale – costs around £6bn a year, or nearly 2p in the pound on income tax if you also raise the threshold for the minimum income guarantee.

If you do not, five million of the poorest pensioners are no better off. The current level of basic state pension already accounts for half the social security budget – and as the proportion of older people in the population increases, it will become even more costly.

The ACA recommends that higher basic pensions are paid for by an increase in retirement age and greater flexibility. The former would be highly unpopular and hugely impractical for blue-collar workers. And the ACA produces no figures to suggest what the new retirement age would have to be in order to be revenue-neutral in terms of cost.

With 60 per cent of men between the ages of 60 and 65 already not working, it seems highly unlikely that increasing the pension age would produce much in the way of cost saving. If individuals did not qualify for retirement pension, the vast majority would be eligible for non-contributory benefits, as now.

The NCC makes the point that pensions tax credit, due to be introduced later this year, will simply make pensions more complicated, and calls for means-tested top-ups, such as the minimum income guarantee, to be abolished and replaced with a higher basic state pension. The NCC makes no suggestions as to how the enormous cost of increasing pensions across the board would be paid for.

The ACA is most critical of Government&#39s failure to do anything to encourage private saving in either personal or occupational pension schemes, citing 93 per cent of employers who believe that the Green Paper proposals will be ineffective in promoting greater occupational pension provisions. The ACA&#39s survey also found that 95 per cent of employers want the basic state pension included in any reform proposals.

All of this is fine. But it totally ignores the fact that taxpayers are already griping at increases in taxation and are unlikely to accept that taxes have to go up substantially to pay for higher basic state pensions.

It also ignores the basic question, why should employers be responsible for individuals&#39 income in retirement? Is this not a responsibility of Government and the individual?

But there are things the Government could do which would make a substantial difference. Government is not keen to impose compulsory occupational pension contributions – not least of all because Government will be blamed for any gyrations in share prices which adversely affect the pensions that individuals receive.

One suggestion is that stakeholder pension schemes, which employers are now obliged to set up, should be made compulsory for all employees unless they make the positive decision to opt out. Given the general apathy of the public about all things financial, the likelihood is that most would remain in the schemes and pay their contributions.

With regard to the complexity of state pensions, social security benefits and pension credits, and pensioners&#39 resistance to “means testing”, the obvious way forward is to merge the Inland Revenue with Social Security and introduce “negative taxation”. When an individual is working, they suffer the ultimate “means test” – the declaration of their income and assets to the Revenue.

Why not then give them “rebates” when they are not working or retired, through the Inland Revenue? Not only does this do away with tens of thousands of civil servants, but it also removes the stigma of means testing.

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