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Give credit to Turner

Scare stories surrounding the Pensions Commission proposals are disappointing.

Never mind the politics. What does Adair Turner say about pensions?

Well, here is one quote which is hard to argue with. “People are living longer. That is a marvellous development, which will only become a problem if we fail to think through the policy responses required.”

Is there anything wild or rash in Turner’s final report? He has recommended raising the age at which you can first claim the full basic state pension from 65 to 66 by 2030, gradually going up to 68 in 2050. So those currently over 40 would be unaffected, making the politics much easier than all the leaks and counter-leaks would suggest. Only those now turning 20 might have to work until 2050 and they are hardly thinking about pensions.

Turner also recommended stepping up savings through a National Pension Savings Scheme but admitted that his plan would require some mix of higher public expenditure as a percentage of GDP, for which read higher taxes.

It is potentially the most important reform to the welfare system since Beveridge. Given that, it is disappointing that some have been unable to resist the temptation to create a scare story. Work longer, save more and pay more tax.

That misses out the other half of the equation – a 33 per cent boost to pensions. Is that a good deal? Well, would any private scheme be willing to boost your pension by a third if you defer for two years?

Few people like the idea of working until 68. Neither do many like the idea of higher taxes or being made to save more. But unless you believe it is acceptable that pensioners should become increasingly poor compared with the rest of society, either you do a lot of one or a bit of each.

Raising the retirement age to 72 would cover the costs. So would boosting taxes by 5p in the pound or forcing people to save upwards of 10 per cent of their earnings each year. Given that all those are politically unpalatable, Turner has proposed a rather moderate, British sort of compromise – a balanced combination of all three.

The debate about affordability centres on a crucial fact. The Treasury has resisted saying whether the pension credit will in future rise in line with earnings or prices. Prices rise by roughly 2 per cent a year and earnings closer to 4 per cent.

There are good reasons for the Treasury’s resistance – it does not actually know if the pension credit will go up in line with earnings or inflation. Here’s why. In this country, there is no constitutional, legal or other mechanism to stop one Government’s reforms being dismantled entirely by the next Government or the one after that or the one after that. As pension reforms have to last not for one or two Parliaments but for 10, that is a serious problem. No one – not the Treasury, nor IFAs, nor anyone else – can validly predict anything.

Nevertheless, it might be nice to know what the Treasury intended. If, for example, the pension credit is not intended to go up in line with earnings, it means that over the years pensioners get less and less relative to everyone else. This is the problem which the introduction of the pension credit was meant to address.

But if the pension credit is to rise in line with earnings and the basic state pension continues to go up in line with prices, then over time the pension credit will go up in a steep line and the basic state pension in a shallow one. Within a few decades, the basic state pension will become negligible as a proportion of pensioners’ incomes while the pension credit turns into practically the whole of a pensioner’s income from the state.

According to some calculations, only those in the top fifth will not qualify for the means-tested top-up.

In that case, the means test loses its point as the money is no longer targeted on the poor. In fact, it only costs a little more to guarantee the same income to everyone. There are two side benefits -you get rid of the indignity of having to prove how poor you are to get your full entitlement and it becomes much cheaper to administer. If the pension credit is linked to earnings, then it is hard to show why you need a means-test instead of a higher basic state pension for everyone.

In that case, it is harder to argue that we cannot afford to do what Turner suggests and it is much easier to argue that we cannot afford not to. Money Marketing50 Poland Street, London W1F 7AX


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