APPENDIX 3
Memorandum submitted by Age Concern (CP
21)
INTRODUCTION
Age Concern welcomes the Committee's inquiry
into the contributory principle. There have been many changes
to contributory state pensions and benefits over recent years
and we have been concerned that this has been carried out in the
absence of a clear and public debate about the type of social
security system that is most appropriate. This response mainly
concentrates, on the contributory principle in terms of pension
provision although many of the points could also apply to other
contributory benefits.
1. SUMMARY OF
MAIN POINTS
1.1 Over recent years the system of contributory
benefits has gradually been eroded and in general these have been
replaced by a means-tested safety net with people being encouraged
to take out private provision.
1.2 Most people appear to support the principle
of contributory benefits and oppose means-testing although many
have a limited understanding of how current systems work.
1.3 Age Concern believes that before there
is any debate about the best way to provide pensions and benefits
it is important to consider what the systems are intended to achieve.
1.4 Fundamental to the discussion is the
balance between means-tested and contributory benefits. We believe
an adequate income in retirement should be achieved with a minimum
reliance on means-testing due to the inherent problems with these
benefits.
1.5 Age Concern strongly believes that a
non-means-tested pension paid at a level to meet basic costs is
the best way to enable people to achieve an adequate retirement
income and to encourage saving for retirement.
1.6 In order to achieve better retirement
provision, overall it is likely that we will have to pay more.
This is likely to need improvement in both state and private provision
but we see no reason to change the balance of pension finance.
1.7 We believe that maintaining and improving
the contributory system will help achieve the Government's aim
of an inclusive society.
1.8 Economic and social conditions have
changed greatly since the time of Beveridge. However we believe
that many of the principles behind his reforms remain important.
1.9 Most women now have some income in their
own right but levels of earnings and retirement income are generally
lower than those of men. A basic non-means-tested pension is particular
important for women and the system needs modernising to ensure
that more women are included.
1.10 Better understanding of pension and
benefit systems is essential in order to enable people to plan
for their future but also to ensure that people are in a position
to contribute to debates on the future of welfare provision.
1.11 Age Concern believes that to restore
confidence in state schemes it is essential to ensure that people
receive benefits based on the contributions made and the expectations
they had been given.
1.12 Maintaining and improving the current
system of benefits is likely to require increased contributions
at some point. There are a range of ways this could be done.
1.13 Age Concern is very supportive of the
current contributory system as a way of providing a non-means-tested
income in retirement. However there may be alternative systems
that can also achieve this such as a Citizen's Pension.
2. THE DEVELOPMENT
AND CUTTING
BACK OF
CONTRIBUTORY BENEFITS
2.1 Although the first contributory pensions
started in the 1920's, the current national insurance (NI) contributory
scheme is based on the system introduced in 1948 following the
Beveridge Report. Provision within the contribution system for
long-term unemployment and sickness was extended in the 1970's.
In terms of pension provision the graduated pension scheme started
in 1961 but this was abandoned in 1975 and after considerable
debate in Parliament the state earnings-related pension scheme
(SERPS) was introduced in 1978.
2.2 However cutbacks followed, including
changes to unemployment benefit, widows benefits, and invalidity/incapacity
benefit. SERPS had only been in place for seven years when the
Government proposed phasing out the scheme but in the end passed
legislation in 1986 (and later in 1995) reducing the pension provided.
Meanwhile the basic pension and linked benefits continue to lose
value in relation to earnings and the Welfare Reform and Pensions
Bill, currently before Parliament, makes further changes—restricting
incapacity benefit and widows benefits.
2.3 In summary over recent years the system
of contributory benefits has gradually been eroded. In general,
state contributory benefits have been replaced by a means-tested
safety net with people being encouraged to take out private provision.
3. PUBLIC AWARENESS
AND ATTITUDES
3.1 Age Concern's extensive contact with
older people indicates that most are very supportive of the principle
of contributory pensions and benefits. There is a strong feeling
that they are entitled to the state pension because they have
"paid in" although many complain that after 40 or more
years of contributions the level of the pension is too low. Support
for contributory benefits was also reported in two pieces of DSS
research. The first looked at pensions and retirement and involved
16 discussion groups consisting of people of different ages[16].
The summary states "Pension entitlement is based on contributions,
and most people feel that having `paid in' gives them a special
entitlement". Most participants felt the basic pension should
be increased and were opposed to means-testing. Many felt it was
"wrong and anomalous" that the basic pension, for which
people had paid contributions, was less than the income support
level for pensioners. A second report drew on this and other studies
to look at attitudes to the welfare state[17].
It concluded that the public "appeared to be uncomfortable
with the idea of means-testing". One of the reasons why people
objected to means-testing was because they felt that "the
link between paying in and `getting out' (the contributory principle)
should be maintained".
3.2 However the DSS reports also found that
many people had little knowledge or understanding of current systems
and the way they are funded. This is also in line with our experience.
Understandably many people assume that the NI scheme acts like
a privately funded pension with their contributions invested to
provide their future pension.
4. ADVANTAGES
AND WEAKNESSES
OF THE
CONTRIBUTORY SYSTEM
4.1 This section summarises some of the
main features of the current UK contributory system which includes
flat-rate benefits based on contributions and credits (eg the
basic state pension) along SERPS which is related to earnings.
Both employees and employers contribute although this paper concentrates
on the system from the point of individuals as contributors and
beneficiaries.
4.2 Some of main advantages are:
— Benefits provided are generally not
subject to means-testing. (However it should be noted that contribution-based
jobseeker's allowance is reduced by private pensions over £50
a week and the Government intends that similar provision will
apply to incapacity benefit in the future.)
— As discussed above people may feel
they have a greater right to and sense of ownership of benefits
to which they have specifically contributed.
— As a national contributory scheme
it gives all who are able to contribute (or are covered by credits
or home responsibilities protection) a stake in the system.
— A state contributory scheme can,
while linking contributions and entitlements, also bring about
redistribution both between groups (eg from the better off to
poorer people or from men to women) or across the life cycle.
4.3 Weaknesses of Contributory Schemes include:
— As schemes are traditionally based
on contributions during periods of employment, gaps can arise
for people with incomplete employment records.
— Where benefits are based on contributions
over a lifetime, such as the state pension, those who move from
abroad may find it difficult to build up entitlements. Others
are disadvantaged by moving abroad—for example despite a
life time of contributions, pensioners who move to a country where
there is no reciprocal agreement with the UK do not gain annual
pension increases.
— While the inclusive nature of benefits
under contributory systems is listed above as an advantage, others
would argue this is an inefficient use of resources giving state
support to those people who do not need it.
— Some may object to compulsory state
contributory schemes, preferring to choose whether or not to make
provision for their future, and if they wish to do so, choosing
what kind of cover to provide.
5. AGE CONCERN'S
VIEW ON
PRINCIPLES BEHIND
PENSIONS AND
BENEFITS
5.1 Age Concern believes that before there
is debate about the best way to provide pensions and benefits
it is important to consider what the systems should provide. In
terms of pension provision we believe the Government's role is
to define what levels of income are needed for an adequate retirement
income and the best way of achieving this through state and private
provision. This will include considering the appropriate balance
between different types of provision taking into account economic
and political factors.
5.2 Once there are clearer aims for retirement
provision it will be easier to assess whether current or proposed
policies will achieve the target of an adequate income in retirement
for all. In responding to the Green Papers on welfare reform and
pensions, one of our major concerns has been that the Government
has made little attempt to define its objectives in terms of the
income levels being aimed at, and has argued for greater private
provision with no detailed justification for doing so. Furthermore
the papers provide little discussion on the different types of
social security provision and advantages and disadvantages of
contributory benefits, means-testing and other systems.
5.3 Age Concern believes that fundamental
to the discussion is the balance between means-tested and contributory
benefits. A decent income in retirement should be achieved with
a minimum reliance on means-testing due to the inherent problems
with means-tested benefits described below. However the Government
has argued that the best way to use resources is to target state
support on the poorest. Below we look at the reasons why we believe
means-testing should be limited and then consider whether it is
necessary to change the balance between state and private provision.
6. CHARACTERISTICS
OF MEANS-TESTED
SCHEMES
6.1 The principle behind means-tested state
support is that it goes to those who most need it. However targeting
benefits through means-tested support has inherent problems of
low take-up, poverty and savings traps, and complicated and expensive
administration.
6.2 Up to 700,000 pensioners entitled to
income support are not in receipt of the benefit. Age Concern
has been very supportive of Government initiatives to increase
the take-up of income support by pensioners and believe that progress
can be made. However on the available evidence we do not believe
that it will ever be possible to bring take-up levels to anything
like that of the state pension due to factors such as the inevitable
complexity of the systems and attitudes towards means-testing.
6.3 Low take-up clearly has a serious impact
on the individuals who miss out, but the problems of savings and
poverty traps have wider implications. We welcome the intention
to review current income support capital rules and consider income
disregards for pensioners. However such measures, while lessening
the problems, will never remove them. Age Concern hears from many
older people with modest levels of savings or private pension
who feel angry and let down that they are little better off after
struggling to save during their working life. We note that by
the year 2050 the Government estimates that the basic pension
will be worth just £32 in relation to today's earnings while
the basic income support level will be £75. We fear that
those who know they will never be able to build up substantial
private retirement income will have little incentive to save or
contribute to private pensions.
6.4 Based on the available research Age
Concern believes that older people need a minimum of £150
a week for a modest but adequate standard of living. In order
to achieve this there should be a non-means-tested pension paid
at a level to meet basic costs that can act as a foundation on
which to build up additional income and encourage people to save
for retirement. We have argued that the basic pension should be
raised to at least £75 a week but have commissioned research
to establish more clearly the income levels needed to cover basic
costs. This should be available by the end of this year.
7. CHANGING THE
BALANCE BETWEEN
STATE AND
PRIVATE PROVISION
7.1 While Age Concern proposals for the
basic pension would increase state support the Government argues
that relying on "universal state provision to provide decent
state pensions' is "unaffordable"[18]
and wishes to see greater involvement of the private sector in
pension provision. The Pensions Green Paper notes that currently
60 per cent of spending on pensions comes from the state and 40
per cent from the private sector but it is expected that this
will reverse over time so that by 2050 state funding will be 40
per cent and private funding 60 per cent. Anyone earning over
£9,000 will be expected to make private provision and although
they will still be entitled to the basic state pension its value
will continue to fall in relation to earnings so will provide
only limited support. The changes are intended to make the system
"fair and affordable'.
7.2 Age Concern, while acknowledging the
important role of private pensions, is dismayed at what appears
to be a simplistic view that decent state pensions are not affordable
so that the answer is more private provision. This ignores the
fact that all pensions, whether private or state, funded or pay-as-you-go
represent a transfer from one generation to another. As the Pensions
Provision Group states,[19]
"More pre-funding is not a panacea . However they are provided,
pensions are a charge on the economy at the time they are paid".
The Government Actuary[20]
has also argued against relying too heavily on private funded
provision stating that in his view the best option is a "reasonable
level of largely flat-rate pay-as-you-go social security provision
as the basic first pillar". Age Concern believes that in
order to achieve better pension provision, overall we must pay
more towards pensions, and this is likely to need improvements
in both state and private provision. We agree with the Pension
Provision Group's conclusion that "We do not believe there
is evidence available which would justify a dramatic change in
the balance of pension finance."
8. COMBATTING
SOCIAL EXCLUSION
8.1 One of the advantages of contributory
benefits listed above is that such schemes give an opportunity
for nearly all of society to be included. We agree with the Social
Security Advisory Committee's recent comments[21]
that there is merit in a scheme that all citizens have a stake
in, including those who could provide for themselves, and that
the "principles of inclusive social insurance can be said
to play a part in engendering social solidarity and cohesion".
8.2 A major concern is that if contributory
benefits continue to be withdrawn with means-tested benefits as
the main source of income maintenance support, state benefits
will be seen as only for the poor and those who are able to provide
for themselves will have less interest in the systems. Poverty
and savings traps can make it difficult for people to come off
means-tested benefits and can mean people are unable to fully
participate in society. We believe that maintaining and improving
the contributory system will help achieve the Government's aim
of an inclusive society.
9. MODERNISING
THE CONTRIBUTORY
PRINCIPLE
9.1 Economic and social conditions have
changed greatly since the time of Beveridge. However we believe
that many of the principles behind his reforms remain important.
His aim was for everyone who during their working life had fulfilled
"the obligation of service according to his powers"
should receive a pension on retirement that was enough for subsistence
even if they had no other resources. However this was never expected
to be the only source of income in retirement. Beveridge argued
that the pension should not be reduced if the pensioner had resources
in order to encourage additional voluntary saving and insurance.
9.2 Age Concern believes that the principle
of providing a non-means-tested income which can then encourage
additional provision, still holds good. Furthermore, as explained
above we do not believe that a shift from state pay-as-you-go
support to privately funded schemes is necessary for economic
reasons.
10. THE ROLE
OF WOMEN
10.1 One of the most significant changes
has been the position of women. Originally the contributory scheme
assumed that married women would, in general be financially dependent
on their husbands. In the past women in paid work often paid reduced
rate NI contributions which provide no pension entitlement, and
protection for caring responsibilities was not introduced until
1978. It has been argued that because more women are in employment
or have their own independent income, current systems are no longer
appropriate. For example such reasoning has been put forward by
the Government to justify proposed reductions to contributory
widows' benefits for women under pension age without dependent
children. However while more women are earning and therefore more
likely to have independent income, they continue to have lower
earnings than men, and spend more time out of the labour market
because they are still the main providers of care for children
and elderly and disabled relatives.
10.2 On the other hand family breakdown,
and a higher proportion of never married women will mean that
in the future more older women will have to rely on building up
retirement income in their own right. Pension sharing on divorce
and the recognition of the need for carers to build up a second
pension through the proposed state second pension are important
and welcome steps. However the proposed abolition of severe disablement
allowance combined with planned restrictions to incapacity benefit,
will mean that many women who do not fulfil the contribution conditions
for incapacity benefit because they have not recently been in
employment, will have no entitlement to non-means-tested support
in the case of incapacity. Furthermore there are over 2 million
people, mainly women, in work but not paying NI contributions[22]
because they have earnings below the lower earnings limit. The
Government must address the problem of how to include more of
these women in the contributory system— particularly those
who have very low earnings as a result of combining paid work
with caring responsibilities.
10.3 In conclusion while women are now more
likely to have earnings from work and to be making pension contributions,
their opportunities to build up retirement income are in general
more limited than those of men. It is therefore particularly important
for women that there continues to be a basic pension paid at a
reasonable level in order to act as a foundation for retirement
income.
11. IMPROVING
INFORMATION AND
UNDERSTANDING
11.1 As referred to above, it is clear that
most people have a limited understanding of how current state
and private systems work. Often people who have paid tax and NI
contributions for most of their life assume that when they retire,
or need financial support for example due to unemployment, benefits
paid at an adequate level will be available. The reality can often
be different and people are surprised and disappointed at the
low level of support they receive. In terms of pensions we welcome
the Government's commitment to improve the level of information
and advice, for example the aim of providing an annual statement
giving information about both state and private pensions.
11.2 Better understanding of pension and
benefit systems is essential in order to enable people to plan
for their future but also to ensure that people are in a position
to contribute to debates on the future of welfare provision.
12. FULFILLING
PROMISES
12.1 The pensions Green Paper points to
the lack of trust in pension schemes referring to Maxwell pensions
and the mis-selling of personal pensions. However there is also
a need to restore confidence in state schemes given the many changes
that have been made to contributory benefits. Although in general,
changes such as those planned to incapacity benefits and widows
benefits, will not normally affect those already receiving these
benefits, they can be retrospective in that people who have paid
contributions for many years can find that they are no longer
entitled to the benefits they had expected and planned their future
financial position around. For example the recent publicity surrounding
the changes to SERPS for widows/widowers from 6 April 2000 has
shown that many people are extremely angry that benefits to which
they contributed will be halved. In this case, distress has been
exacerbated by the fact that the changes were not publicised and
many people have been given misleading advice by the Benefits
Agency.
12.2 Age Concern believes that to restore
confidence in state schemes it is essential to ensure that people
receive benefits based on the contributions made and the expectations
they had been given. It is possible that reducing accrued rights
to contributory benefits contravenes provisions relating to protection
of property in the European Convention on Human Rights. Many people
contacting Age Concern about changes to contributory benefits
have questioned whether this is allowable under European law and
we believe this is an issue that will need to be tested in the
courts.
13. THE FUNDING
OF A
CONTRIBUTORY SYSTEM
13.1 It is clear that maintaining and improving
the current system of benefits is likely to require increased
contributions at some point. However if people fully understood
how the systems worked and had confidence that they would actually
receive the benefits promised, we feel that people may be prepared
to make increased contributions. There are a range of options
for increasing the level of the NI fund, for example: an increase
in employee and/or employer contributions; abolishing the upper
earnings limit or reviewing the extent to which incentives to
opt out of state provision should come from the fund. More fundamentally
there could be a break with the direct link between earnings and
contributions by extending NI to types of income other than earnings.
14. ALTERNATIVES
TO THE
CURRENT CONTRIBUTORY
SYSTEM
14.1 It would be possible to make substantial
changes to the contributory system. For example, contributions
could continue to be collected from all workers but the benefits
paid do not necessarily have to be directly linked to the number
of years of contributions.
14.2 We also feel there is value in exploring
systems involving the integration of tax and benefits. The Debate
of the Age, a major initiative set up by Age Concern to consider
the implications of an ageing society, commissioned research looking
at a Citizens Pension which includes details of financial aspects
and implications[23].
A Citizen's Pension would provide a non-means-tested allowance
not dependent on contributions paid. One of the advantages of
such a scheme is that it includes all citizens and would be simpler
to administer as contribution records would not have to be kept.
On the other hand there would still be many issues to resolve,
such as the definition of "citizen', and it would remove
the specific link between paying contributions and paying benefits
which, as discussed above, is a popular concept.
14.3 In conclusion Age Concern is very supportive
of the current contributory system as a way of enabling people
to receive an adequate non-means-tested income in retirement.
However we do not rule out the possibility of alternative systems
that could also achieve a similar outcome.
May 1999
16 Pensions and retirement planning by Alan
Hedges. DSS research report No. 83. 1998. Back
17
Attitudes to the welfare state and the response to reform
by Teresa Williams, Maxine Hill and Rachael Davies. DSS research
report No. 88. 1999. Back
18
A new contract for welfare: partnerships in pensions DSS.
1998. Back
19
We all need pensions-the prospect for pension provision
Report by the Pension Provision Group. 1998. Back
20
In a speech to the National Association of Pension Funds on 17
September 1998. Back
21
Social Security Advisory Committee twelfth report. 1999. Back
22
Low pay and the national insurance system: A statistical picture
Equal Opportunities Commission. 1998. Back
23
A citizen's pension by Holly Sutherland, University of
Cambridge, Department of Applied Economics Working Paper. 1998. Back
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