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Michael Johnson: Why we should scrap state pensions for the rich

Johnson
CPS research fellow Michael Johnson

A senior economist at the Organisation for Economic Co-operation and Development has just said that the UK should scrap state pensions for the richest 5 to 10 per cent.  This echoes a proposal made last November in a paper published via the Centre for Policy Studies.

Sooner or later we are going to have to confront the state pension, and ask ourselves what is it for? Fundamentally, is it a benefit paid to those in need, or is it a contractual obligation of the state, established through National Insurance Contributions?  The Treasury’s view is that it is a benefit.

A few years ago, NICs (a cash inflow) and state pension payments (a cash outflow) were roughly in balance. Two years ago, a £4.6bn Treasury grant to the National Insurance Fund was required to plug a growing cash shortfall. Last year that grew to £9.6bn. The direction of travel is clear.

Treasury grants are ultimately funded by tax receipts from today’s workers (or by more state debt, which they will have to service).  And many of them, particularly younger workers, do not believe that they themselves will ever receive a state pension. So much for inter-generational fairness.

In addition, due to the diversity in UK life expectancy, our universal state pension age is increasingly unjust. The average man in Tottenham Green will die much earlier than a man living in Chelsea, to the extent that the return on his NICs, in the form of state pension receipts, is only about a quarter of that of Chelsea man’s. This is terrible value for money for those who can least afford it.

The traditional approach to controlling the cost of the state pension is to send the state pension age into retreat. But this is politically challenging, and consequently implementation is far too slow to head off a pending fiscal crisis. We need to be far more radical.

End the state pension

The state pension should be put into “run-off” so that, from 2020, no further “entitlements” would be created. Past “entitlements” would be honoured, as the “legacy state pension”, and this should be means-tested (along with the whole range of other pensioner benefits).

Essentially, the most wealthy in society should not receive any state pension at all.  They do not need it (particularly those with defined benefit pensions, which the next generation will not enjoy).

A new senior citizens’ pension 

A residency-based senior citizens’ pension should be introduced, payable from the age of 80. All non-pensioners in 2020 would be eligible for it, thus the first payments would be made in 2034.  Perhaps set at £200 per week, it would be 30 per cent larger than today’s full state pension.

A Workplace Isa and income support from retirement to 80

The senior citizens’ pension should be complemented by a Workplace Isa, to accommodate employer contributions made under automatic enrolment.  This would be significantly pre-funded by the state via a 50 per cent bonus, up to a modest annual cap, with no access to assets permitted until 65. The 15 year period until receipt of the senior citizens’ pension invites structured draw down or annuitisation.

Thereafter, the senior citizens’ pension would socialise longevity risk across the nation. There is an opportunity to introduce the Workplace Isa in the 2017 review of automatic enrolment.

The Workplace Isa would be complemented by a robust, means-tested safety net for those who need it: income support should be extended beyond the state pension age.

Funding

These proposals could be funded by ending all income tax and NICs reliefs on pension contributions (£48.1 billion last year, 70 per cent of which went to the top 15 per cent of earners), assisted, over time, by the diminishing cost of the legacy state pension.

Michael Johnson is a research fellow at the Centre for Policy Studies

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. So basically I have worked dammed hard all of my life to build a secure future for my family and have paid tax and National Insurance all the way through. Because I have been careful with my money and not spent it all on cigarettes and booze I will now been penalised and not receive and state pension , despite paying into the scheme for years. Brilliant!!!

  2. Sorry Michael, but your idea completely ignores fundamental issues and simply tries to apply a highly unfair sticking plaster to the problem.

    The fundamental problem is that society itself needs drastic reform, government policy needs to stop driving the widening of the wealth gap, not through “tax”, but through stopping unfair policies that drive the gap.

    People need to stop being indoctrinated into this idea that their is a prize for “participation”, they need to stop being indoctrinated into thinking that the State is the solution to all ills and that big daddy will look after them no matter what.

    They need to be educated and in some cases forced to take responsibility for themselves and accept the reality that people with highly marketable skills that aren’t common will always be far more valuable than those whose job nigh on anyone could do.

    They need to make people work, where they can and stop pandering to those who chose to sit on their backsides and wallow in victimhood/self pity.

    But above all, they need to dramatically cut back the state, dramatically cut back taxation and let people live their own lives and let them make their own mistakes and most importantly take responsibility for their own mistakes.

    It is not my or any other tax payers responsibility to look after those who cannot be bothered to look after themselves.

    Oh a flat rate fair system of taxation, with no in work benefits, control of immigration, solving the housing crisis etc.

    Your proposal, merely replaces one complicated system with another one of similar complexity, which will require vast amounts of investment within the private sector as well as government and penalises those who chose to be sensible and look after themselves, whilst rewarding those who don’t bother.

    You say 70% of all tax relief on pensions is claimed by the top 15% of earners, what you fail to take into account though is that even after that is taken into account the top 5% make up circa 75% of all the income tax paid.

    So you want to make that even more unfair.. great job..

  3. Trevor Harrington 27th April 2017 at 4:24 pm

    Taking the state pension away from people who pass some arbitrary measurement of presumed wealth, dreamt up by a lifetime civil servant, sounds like some sort of communist decision from a banana republic.
    To do so when the over paid, underworked, economically risk free, excessively high earners in the public sector have gleaned underserved, and often fraudulently acquired, final salary pension scheme benefits, which are largely funded by the rest of the tax paying public …. sounds like the stuff of civil war to me.
    As I have said many times before – there is more than enough taxation revenue coming into the treasury, which enables us to afford ALL the benefits and public services that we could reasonably want. We are the fifth richest nation in the World.
    The problem is that successive governments of both political persuasions have spent our money on the wrong things. The cynic in me says that they have spent our money on electoral issues which they thought would return them to power at each general election – buying votes if you wish.
    The state pension is perfectly affordable, even at age 60 for all of our citizens, if only they would cease the fraudulent use of the final salary pension at the top salary levels of all public sector employments, such as early retirements. If they restricted the maximum public sector pension to £40,000 per annum per person it would save the treasury billions each year – but of course that might jeopardise their chance of re-election.

  4. Another hare-brained Government initiative. Just like the LTA, MPAA, cut to the dividend allowance, MPs DB scheme pensions, LISA, self employed NI increase, probate increases, IHT ANRB for children/grandchildren. MP expenses, etc etc

  5. As pointed out elsewhere, if we assume that by the wealthiest 5 to 10% of the population is meant those liable for income tax at the highest rate, these people have already lost their Personal Allowance and their state pension will be subject to income tax at 45%. So, in return for a working lifetime of paying NIC’s, they’re already getting a pretty raw deal. Just how far left of centre are your political views Mr Johnson?

  6. Ridiculous proposition the wealthy have paid more tax and NI than most and deserve it as much as the next person. The issue lies with all previous governments that have been spineless and not tackled the issue in a timely fashion. AE is probably 20 years late and still not compulsory and just as everyone is about to go into a scheme some hair brained twits are now talking about scrapping pensions and using LISA instead. Give me strength!

  7. Have you ever noticed how many people who might be eligible for these new ‘old age benefits’ are walking around with the latest smart phone (I have a 5 year iPhone that work perfectly well!), a new motor (mine? 8 years old), a fag (I don’t smoke) in one hand or a can of booze (I brew my own!) in the other?

    But when I want to enjoy the fruits of my frugality later on, my income will be taxed to pay for the feckless. That’s really going to drive the right behaviours long term.

    Michael – who funds the Centre for Policy Studies to come up with this rubbish? I sincerely hope it’s not the tax payer?

  8. This guy is littering the media with frankly dangerous policy proposals around pensions. His view is that 10K a year is the maximum you could save, we should redistribute wealth in pension contributions and if you bother to even save for this paltry amount (that would likely not amount to any more that the state pension when you retire), if you do so then the state pension “benefit” would be removed. All the while the government would continue to take horrific levels of NI and tax at marginal levels of up to 62%. I hope Theresa directs this rubbish straight to the bin where it belongs!

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