Proposals to abolish the state pension to help balance the UK’s books have divided pensions and policy experts.
An Institute of Economic Affairs report, published last week, said the UK would fall woefully short of meeting national debt targets and that “fundamental reform” of the state pension and healthcare system was a solution.
The think-tank suggests replacing the state pension with compulsory defined contribution pensions but some say that would load too much risk on savers.
Pensions Institute director David Blake says: “In terms of the proposal itself, It places even more risk onto the individual. Good diversification needs a mixture of solutions. The current system has such a mixture: a basic defined benefit state pension and a DC pension.”
Financial Inclusion Centre director Mick McAteer says: “The IEA seems to betray serious misunderstanding of basic economics of pension provision. It has not addressed the increased level of individual risk that would result from exposing people’s foundation income to market risks.”
McAteer says he hopes future Governments are not brave enough to scrap the state pension but he is worried in the present climate.
“The ideology of individualism is very powerful at the moment”, he says.
TUC head of campaigns Nigel Stanley says “no politician would dare take this approach”, labelling the policy “fantasy politics from the barking right”.
However, the concept of weaning the UK off an unfunded state pension system has its supporters.
Institute of Directors senior adviser Malcolm Small says the IEA report uncovers “some pretty uncomfortable home truths”.
“It will take a long time but we need to start thinking about that,” says Small. “If we don’t we’ll be asking a declining pool of young people to pay, through tax, a very unfair burden.”
He says the Swedish government is making a transition similar to that suggested by the IEA.
Last month, the Centre for Policy Studies published a report warning future generations would receive a “derisory” state pension.
The report’s author, Michael Johnson, fully supports the IEA proposal but says the Government will only take action when it is forced to do so.
He says: “We’re in this ridiculous world of ultra-low interest rates. Once the reality starts to change and interest rates rise, the squeeze on the Government’s finances is going to
really pressure behaviours and force political decisions that are extremely unpopular.”
Johnson suggests the state pension system could start to be unravelled after the distinction between welfare and benefits is “reframed”.
He says: “The vaporisation of the state pension will be done, not in a conventional manner but facilitated through reframing of something around welfare and benefits.
“It’s very interesting to see that [pensions minister] Steve Webb has picked up on a line that the state pension is not a benefit. Traditionally we have co-mingled welfare and benefits.
“If we start to separate [pensions] from the welfare/benefits arena, that opens the door to really investigating much more thoroughly what is it really and what is it for.”