Select Committee on Social Security Seventh Report


78. The urgency attached to this inquiry concerns the position of today's pensioners, where the latest figures show that the numbers living in poverty are increasing.[122] 'Today's pensioners' encompasses a group which stretches some distance into the future. Baroness Greengross pointed out, "if we are going into an age when people provide more towards their own retirement, and that is accepted, ...then you cannot expect people who are now over, maybe even 40, certainly 45, to be able to do that, because they just will not be earning for long enough to avoid the problems that today's pensioners are facing."[123] Our analysis of long-term pension reform shows that it will be 25 years at least before the new state second pension will have halted the decline in SERPS which has begun for people retiring after 1999. New stakeholder pensions, yet to come on to the market, will take many years to mature. Meanwhile the value of the state retirement pension is declining as a proportion of average earnings. For the current generation of pensioners, and those retiring in the next 20 years or so, more immediate measures are needed if the problem of pensioner poverty is to be addressed.

79. The National Pensioners Convention argued that, "whatever advantages may accrue in the distant future from the development of occupational and stakeholder schemes, only the state scheme can deliver short-term improvements."[124] We agree that only the state is in a position to respond to the current problem of pensioner poverty. The question we have grappled with is, until the Government's wider pension reforms take effect, how best can the state ensure that present day poverty among pensioners is overcome? The arguments put to us can be distilled into two distinct approaches. The first is the case for raising the basic state retirement pension. The second is the case for a means-tested approach to target the poorest pensioners. The arguments for and against these different approaches are discussed below.

Raising the state retirement pension

80. "In our view, improving the basic retirement pension is the quickest way of substantially relieving poverty."[125] The view of the National Pensioners Convention is representative of the many contributions to the inquiry we have received from pensioner organisations, both local and national, supporting the case for raising the basic state retirement pension as a means of tackling pensioner poverty. Age Concern commented, "What pensioners consistently tell us is that they want a decent level of non-means-tested income and the choice of how to spend their money."[126]

81. Many of the arguments in favour of using the state retirement pension as the basis for improving the incomes of pensioners draw on a belief in the principles of National Insurance, which were explored by us in our last inquiry into the Contributory Principle. Mr Jack Jones of the National Pensioners Convention was the clearest exponent of the value of the contributory system of benefits. He said, "When the pension came in, the objective was to take people out of was introduced as a contributory scheme, backed by the nation, and with a contribution from the nation... Attlee (when Prime Minister)....promised that the pension would be adequate to live on without means-testing, that was the purpose. ...The idea that everybody contributes compulsorily to a state scheme, backed by the state, the employers all contribute, and the state makes a contribution, is a very good conception, that ensures that the bulk of people are covered by it. ...It does seem to me that if everybody is going to be protected against poverty in retirement you cannot do without a very good National Insurance scheme and Fund."[127]

82. The argument, put most strongly by the National Pensioners' Convention (NPC), was that the basic state retirement pension, paid for by National Insurance contributions, provided the best system for government whereby poverty could be prevented for everyone, rather than simply alleviated for the poorest through means-testing. In the words of Mr Tony Lynes of the NPC, "we are concerned about having a decent pension system which is going to guarantee everybody who has been in work a pension which is above means-testing level."[128] An intrinsic part of the National Insurance principle is that, not only does everybody pay towards the benefits, but everybody is entitled to draw benefits on an equal basis as of right, regardless of means, because they have paid for them. Mr Jack Jones confirmed: "the principle of everybody paying and everybody drawing is vital, it ensures that everybody gets something in their retirement."[129]

83. The virtual unanimity among pensioner organisations of the need for a rise in the basic state pension comes against the background of the continuing erosion of its value compared to living standards as a whole, since the upratings link with earnings was abolished in 1980. Between 1975 and 1982, the basic state pension was consistently around 22-23 per cent of average earnings.[130] If paid at the same proportion of average earnings today, it would be worth £97.60.[131] The latest uprating of the basic pension in line with prices, which resulted in a rise of 75 pence, was a particular source of anger. One local pensioner group appeared to sum up the general feeling among pensioners:"rising costs that are met with paltry amounts of 'help' such as this year's 75p state pension increase create a deep sense of older people feeling disregarded."[132] Mr Jack Jones of the National Pensioners Convention made the point that the problem was related to the low underlying level of the basic pension: "[pensions] are not related to prices, they are related to the prices index as a percentage of a very, very low is a fact that, if you apply a low amount on a percentage basis to a very low base, you get a very low increase."[133] Mr Jones expressed a common grievance of pensioners that "we contributed over all our working lives," yet in old age they find themselves relatively poor.[134]

84. A key argument put forward by those in favour of an increase in the basic pension was that a rise would reach the large group of poor pensioners who are not in receipt of Income Support. It would reach those pensioners - estimated by DSS to be 500,000 to 870,000 in number [135] - who fail to claim means-tested assistance and who are thus living at incomes below the Minimum Income Guarantee level. A rise would also reach pensioners, who although still poor, do not qualify for Income Support due to small amounts of income which take them above the MIG level, or with savings in excess of the capital limit. The National Pensioners Convention told us, "poverty is not just confined to those who apply for mean-tested benefits, there is massive poverty above the limit of the means-tested benefits."[136] The NPC argue that pensioner poverty covers those with incomes up to 50 per cent above Income Support level.[137] However, those dependent on MIG would see little, if any, benefit from an increase, which would be offset against their MIG entitlement. It would also benefit (subject to tax deductions) those in the top brackets of pensioner income who may not need the increase so much as those at the bottom (see paras 99-100 below).

85. Various proposals were put forward to increase the level of the State Retirement Pension. The most popular was to restore the upratings link with earnings because, in the words of Mr Jack Jones, "it is the only way you maintain a level which is relative to the rest of the population...whether we get a large increase now or not, it has got to be linked to the average standard of living."[138] The Government Actuary explained to us that the cost of restoring the earnings link would be cumulative. He estimated that the cost in the first year would probably be half a billion pounds, rising to £10 billion by 2010.[139]

86. Most pensioner organisations also wanted to see a substantive rise in the level of the basic state pension level. Mr Jack Jones told us, "many pensioners who have contributed all their working lives are relatively poor, and that ought to be dealt with by an immediate increase of a substantial amount in the basic pension."[140] He said that, in terms of an immediate increase, the NPC would be happy to begin with a 'one-off' increase, financed by the current surplus in the National Insurance Fund.[141] The Government Actuary told us that the National Insurance surplus stood at £3 billion in April 2000. Using that surplus to fund a one-off increase in the value of the basic state pension would allow a rise of £6 in the basic amount,[142] though the issue remains of how much an increase, if it were to be sustained, would be funded. We return to this at paragraph 97 below. Age Concern made the case for a substantial rise in the basic state pension, on the basis that the best way to address poverty in retirement was to provide a basic pension that covered essential living costs.[143] Their estimate was that the cost of raising the basic pension to the £90 level which they estimated was needed to support a low cost but adequate life-style was £10.5 billion, or just over £8 billion when the resulting reduction in the numbers on means-tested benefits were taken into account.[144] In its 1997 submission to the Government's Pension Review, the National Pensioners Convention had also proposed that not only should the earnings link be restored, but that the Government should move over a five year period to restoring the value of the basic state pension to its 1980 level.[145] The Minister of State estimated the cost of this would be £13 billion.[146]

87. It was suggested to us that older pensioners were a priority when considering higher pensions, due to their greater poverty. Ms Holly Sutherland commented, "if you are particularly concerned about the elderly pensioners being the ones who are poorest, it makes sense to target in that way, simply by age, which is very easy, and to work downwards by age as time goes by."[147] Currently the basic pension does have an age increase at age 80, worth 25 pence - an amount which the Minister of State admitted was insulting and "a festering sore in the system."[148] The Government Actuary has estimated that the cost of raising the state retirement pension awarded to pensioners aged 75 or more to the level of the MIG for this age group as £3.6 billion gross in the current year or £2.6 billion taking account of resultant savings in means-tested benefits. The gross costs would rise to £5.8 billion by 2010. If an increase were awarded to pensioners aged 80 or more to bring the state retirement pension up to the level of the MIG for this age group, the immediate gross cost would be £2.4 billion with a net cost, after taking into account the savings on means-tested benefits, of £1.6 billion. The gross costs would rise to £4.2 billion by 2010.

88. One of the difficulties with the debate on the state retirement pension is the strong feeling of many pensioners that they have been cheated out of something they have paid for. As we discovered in our inquiry on the Contributory Principle,[149] it is a common belief among many pensioners that the money they have paid into the fund has been stored for them as a sort of personal 'kitty.'[150] In fact, the National Insurance Fund works on a pay-as-you-go system. Moreover, the point was made to us by Mr Andrew Dilnot, Director of the Institute for Fiscal Studies, that pensioners who say they want their contributions back in the form of a decent state pension might be disappointed. He said, "I do not think that you would find your pensioner in favour of that, because...he or she would have paid contributions that would entitle her or him to a lower benefit than is currently available from the state, because the characteristic of state benefits of the post war period and the reason the [contributory] principle has been eroded is that benefits have been made more and more generous repeatedly. If your pensioner had the benefit that Beveridge intended for him or her, he or she would be a great deal poorer than they are now."[151]

89. The Government has made it very clear that it does not see the State Retirement Pension as the means to overcome pensioner poverty. The Green Paper, which set out the Government's plans for pension reform stated, "Relying on universal state provision to provide decent pensions would be unaffordable and poorly targeted as the numbers of pensioners increase."[152]

90. Although the Minister of State's figures were slightly different from the Government Actuary's, he confirmed that one of the reasons the Government would not restore the earnings link, let alone raise the basic pension to its 1980 level, was partly due to the cumulative cost:

" of the great problems of looking at this is that you have to look ten, twenty, thirty years ahead because you have to manage the National Insurance system...Doing it [restoring the earnings link] and just for 2010 we would be up to £7.5 billion, so you can imagine by 2030 it is up to a much bigger figure...If it had been restored earlier on, back to what it would have been with all those years missing, it would be £13 billion. I do not think anybody is asking for that."[153]

Similarly, when asked for his response to the suggestion of a higher rate of state retirement pension for older pensioners, his response was that it would be "enormously costly."[154]

91. The Minister also argued that the decision to link the basic retirement pension to earnings in 1975 was intended to get a faster boost for the basic pension in advance of the gains which the State Earnings Related Pension Scheme (SERPS), also introduced at that time, would eventually deliver.[155] He suggested that, had the earnings link not been cut, SERPS might have faced abolition rather than simply being reduced: "The two things would not have worked, I suspect. SERPS might have gone altogether, not just been interfered with in 1985 and 1986."[156]

92. But is an increase in the basic state pension really unaffordable? Mr Andrew Dilnot of the Institute of Fiscal Studies told us:

"The public finances at the present time in the United Kingdom are in a very good position... We could, if we wanted as a society, move back towards earnings indexation. That is, we could choose to spend money on increasing the basic state pension...Would the economy fall apart? Would everybody stop working? I have never found those arguments very persuasive...the economic difficulties associated with it would in my view be very small."[157]

93. We asked the Government Actuary to explain the implications of paying for restoring the earnings link in terms of higher National Insurance contributions. In his view, contributions would not need to rise until "somewhere in the second half of the next decade" ie. at some point between 2005 and 2010.[158] He has calculated that National Insurance levels paid jointly by employers and employees would have to rise by 4.1 percentage points in the next twenty years, and by 9.4 per cent over the next 40 years.[159] When considering the rise needed on an annual basis, restoring the earnings link would mean an overall increase in contributions, split between employers and employees, of 0.2 per cent per annum over twenty years, or 0.23 per cent over sixty years. This compares with the Treasury assumptions of real earnings growth during the same period of 1.5 per cent per year. The net effect is that the rate of growth of real earnings is likely to be much higher than the growth required in the contribution rate. The Government Actuary said in his latest quinquennial review of the National Insurance Fund, and confirmed to us in oral evidence, "real earnings growth will result in working people being relatively better off in future even if National Insurance contribution rates were to be increased to meet the cost of increasing flat rate benefits in line with earnings."[160]

94. Expenditure from the National Insurance Fund (over 80 per cent of which is pensions) currently represents around 5.5 per cent of GDP, and is predicted to fall from around 2030 to between 4.5 and 4.7 per cent. The Government Actuary told us that restoring the earnings link would mean that NI expenditure would instead rise as a proportion of GDP by around 2.5 per cent.[161] He commented, "even if we had earnings upratings, that would only be an increase of something like 1.5 per cent a year on average over the period from a fairly low base. The decision is on how governments wish to spend money and what are the priorities, but relative to other countries we are in quite a favourable position."[162]

95. At our request, the Government Actuary also estimated the increase in National Insurance contributions required if the basic state pension for pensioners aged 75 or over or those aged 80 or over were increased to the level of the Minimum Income Guarantee.[163] He estimated that, in the case of a rise to the MIG level for pensioners aged 75 and over, the increase in the joint level of employer/employee contribution rates would be 1.6%, rising to 7.1% by 2050. To raise the basic pension for pensioners aged 80 or more to the MIG level would require a rise on 1.2% in contributions, rising to 5.2% by 2050.

96. Mr Andrew Dilnot suggested that if the basic pension were to be increased, he would favour doing so by means of raising income tax rather than national insurance contributions. His argument was that the NI contribution system had a narrow funding base, with certain groups, notably self-employed people and people over pension age with private pensions, not required to contribute.[164] Ms Holly Sutherland has also suggested widening the base from which the state retirement pension is financed, by means of a 'citizens pension contribution'. This would be levied as a uniform proportion of all current earned income (from employment and self-employment), all second tier pensions (SERPS, occupational and personal pensions) and income from capital.[165]

97. There was considerable debate about using the surplus in the National Insurance Fund. Mr Andrew Dilnott, who told us he was not a "big fan" of the National Insurance Fund, said that the surplus was simply a question of accounting, and should be ignored.[166] In contrast, the National Pensioners Convention suggested that the surplus in the National Insurance Fund would have risen to around £10.8 billion by April 2002, and that there was therefore scope for funding a pensions rise.[167] The Government Actuary put the current surplus in the Fund at around £3 billion.[168] The difference in the figures reflects different definitions of 'surplus.' The National Pensioners Convention figure was based on the amount by which the balance which has accumulated in the National Insurance Fund over recent years was expected to exceed the minimum balance recommended by the Government Actuary at the end of the financial year 2001-2002.[169] The Government Actuary's figure (given in the context of estimating the value of a one-off (but then sustained) rise in the basic pension using the surplus) was based on the estimated excess of contribution receipts over benefit payments in 2001-02 alone.

98. The surplus in the National Insurance Fund also featured during our previous inquiry into the Contributory Principle.[170] The Secretary of State told us then, "some people have said that if you increase the state pension by a little more this year, you will use that surplus and that is fine. However, that would take the surplus away in two years and you would then be left with a National Insurance deficit. You cannot make long-term decisions on benefits based on what could be a temporary surplus."[171] Our conclusion then, based on discussions with the Government Actuary, was that unless there was a significant change in policy, there was likely to be a growing surplus in the National Insurance Fund, as a result of benefits being linked to prices and contribution income, based on earnings, rising at a faster rate. But the use of any surplus had to be sustainable in the long run.[172]

99. The point made to us repeatedly by the experts was that increasing the state retirement pension, and in particular, restoring the earnings link, was certainly affordable but that it would require political choices to be made. The political context, said Mr Andrew Dilnot, was, "a world where governments seem committed to either not increasing the tax burden or being very embarrassed when they are discovered having increased the tax burden, so that there is some constraint on overall revenue."[173] The National Pensioners Convention want to challenge this context:

"We reject the idea that there is a fixed total of public expenditure (including expenditure from the National Insurance Fund) to be allocated to people over pension age. It is clearly not possible to abolish pensioner poverty without allocating a larger share of the national income to pensioners. There are fundamental political choices to be made about both the amount of expenditure and the way in which it is financed."[174]

100. So would people be prepared to pay more for a better basic state pension? Age Concern made the point that "in order to achieve better pension provision, as a society, we must pay more towards pensions."[175] DSS research does suggest that the public at large would be prepared to pay something towards an increase in the basic state pension. A study based on 16 group discussions with 97 members of the public found that, when given the figures on how much it would cost in terms of higher National Insurance contributions, they were certainly willing to fund to a level which would add another £10 to the basic single pension, and probably to add another £20-£30. The provisos were that young people had to be reassured that the system would continue, so that they were making an investment in their own future as well as supporting today's pensioners; that the extra money should be seen to go to pensioners; that reassurances could be given that increased NI charges would not reduce employment; and that people's attitudes might be different if it was part of a larger package of charges.[176]

101. It is also the view of the Government that increasing the basic state pension is an inefficient method of helping poor pensioners, because the money is poorly targeted. The Minister of State told us:

"A simple rise in the basic state pension gets everyone a big cheer, it is a bit like restoring the earnings link, a typical big cheer, but it does not do anything for today's poorer pensioners. ...Overall pensioner incomes have gone well ahead of earnings on average, but people do not live on averages. It is that bottom fifth, and probably the fifth just above that, that we have to get more help to fast, not something we can plan for a decade's time. The basic state pension will not help them because they literally would not get any more because they would be on the means-tested benefit and we would be wasting money, if you like, out of the system by not targeting it. The central issue at the moment is to get money to the poorer pensioners fast. We cannot do that by lifting everybody up at the same rate.[177]

102. The figures show that, of the nearly 11 million pensioners currently in receipt of state retirement pension, around 1.3 million are in receipt of Income Support and therefore would receive no immediate financial benefit from a rise in the basic pension (unless, due to other income, the rise was sufficient to float them above IS level). There are other pensioners who would not receive the full benefit of an increase in the basic state pension. Pensioners in receipt of Council Tax benefit would lose 20%, whilst recipients of Housing Benefit as well as Council Tax benefit would lose 85%. A Parliamentary written answer stated that 40% of pensioners pay income tax. Estimates for the number of pensioners paying taxes at differing marginal rates were as follows:[178]

Number of Pensioners (in millions) by marginal tax rates

Marginal Rate
0% (non-taxpayer)
22%, 23% or 24%

103. Four main counter-arguments were advanced by organisations representing pensioners to refute the Government's approach. Firstly, they argued that, in focusing on channelling money to the poorest pensioners through the Minimum Income Guarantee, the Government was simply alleviating present day pensioner poverty, not creating a system which would prevent it.[179] By allowing the basic state pension to decline in value relative to the MIG, the Government was creating a system where more and more people were locked into the means-tested system. Putting money into the basic state pension was not a waste of money; quite the contrary, it was the main means of enabling millions of pensioners to have an income which took them above means-testing level, thus allowing them to get the full advantage of any additional income or savings achieved by their own efforts.[180]

104. Secondly, the Government approach ignored the fact that, although pensioners' incomes had grown, the majority were still in the bottom half of the income distribution (see paragraph 9). Mr Tony Lynes of the National Pensioners Convention said: "If you...look at what has happened to people above Income Support level, the debate tends to be very much in terms of, on one side, the poorest pensioners, and, on the other side, a relatively small number of rather rich pensioners...but, of course, the vast majority of pensioners are somewhere in the middle and they tend to be much nearer the lower end than they do the higher end."[181] On this argument, although not paid on the basis of a means-test, the basic state pension does in fact go to the less well-off. Moreover, if a higher rate of the state retirement pension were paid to older pensioners at the age of 75 or 80, that increase would go to a group already identified as likely to be poor.[182]

105. Thirdly, the point was made that the income tax system provided the fairest method of recouping money from the better-off. On this analysis, the Government were to be criticised for wasting money in giving tax-free Winter Fuel payments and television licences to people rich enough to pay tax.[183] The same criticism, though, could apply to an income in basic state pension which is taxable. The Government's answer is that by making such payments universal, they benefit all pensioners, including those on MIG, as to pay the money otherwise could result in a reduction of MIG, as it would be taken into account in the MIG means-test.

106. Fourthly, the Government's claim to be helping the poorest pensioners was undermined by evidence that a considerable proportion of the Government's target group - pensioners eligible for Income Support on low income grounds - were not claiming the assistance on offer. The reasons for this are discussed further below. Because the state retirement pension had virtually 100 per cent take-up, it was a more effective means of improving the living standards of those pensioners living below the Minimum Income level.[184]

107. Mr Andrew Dilnot summed up the conflicting viewpoints as follows:

"If our only concern is targeting the standard of those living on the lowest incomes, then we will always be driven towards relying more on means-testing and less on universalism. If our key concern is upholding the dignity of the elderly, then we are driven towards universalism."[185]

Ultimately he said, "whether we should have an entirely means-tested or universal pension, that is entirely a question of resources."[186]

108. We have concluded that, whatever the merits of the argument as to whether this is the way we should to go, a rise in the level of the state retirement pension by index linking it either to an index based on the FBU/Age Concern concept of low cost but acceptable income or to earnings is affordable, but only in the context of people being prepared to pay higher taxes and national income contributions in the long run.

The Minimum Income Guarantee

109. The Government has targeted assistance to the poorest pensioners by raising Income Support levels, through the Minimum Income Guarantee. An initial rise above price inflation in April 1999 (£4.55 for single pensioners and £7.35 for couples) was boosted by the commitment to increase the MIG in line with earnings for the rest of the Parliament. The DSS told us, "this means that the Government has been able to increase the income of the poorest pensioners at a faster rate than would have been possible through the basic state pension."[187]

110. The Government argues that through the MIG, it is targeting substantial extra money at pensioners in greatest need. During the lifetime of this Parliament, the Government would have spent £4.2 billion if it had uprated the basic pension in line with earnings.[188] This compares with £2.2 billion extra spending on Income Support through the Minimum Income Guarantee.[189] It has spent a further £3.8 billion on Winter Fuel Payments and £0.7 billion on TV licences, which go to all pensioners regardless of means.[190] The Minister of State told us: "In the main we have put money in right across the pension population, tax-free and we put a big piece in for the MIG at the bottom end of it, to target that group, so more to poor pensioners fast."[191]

111. Mr Tom Ross of the Pension Provision Group endorsed the Government's approach. He said, "in the short term...unless state pension rights can be improved to a level which I feel probably would be very difficult to meet the cost of, then it is inevitable if you are going to help people that more people will be eligible for Income Support. We should be saying that is a good thing, not a bad thing."[192]

112. Those critical of the Government's decision to prioritise means-tested assistance as the best means of providing for poor pensioners point to the savings disincentives inherent in the means-tested approach. They refer to the bitterness felt by many older people with modest savings or additional pensions, who find that as a result of their financial efforts during their working lives, they are little better off than people who have never made such self-provision. Age Concern gave several examples of the problem, including a couple with a full basic pension on the husband's contributions, receiving partial help from Housing Benefit and Council Tax Benefit, who could end up with an income of less than £6 more than the Income Support level, despite an occupational pension of £50 a week.[193] One woman wrote to Age Concern:

"I am in my eighties and worked to receive the basic pension. I never worked for a firm that had a company pension but I did save extremely hard for my retirement. But I now see how stupid I was because I get 75 pence increase and cannot claim benefits because my savings bring me over the limit."[194]

113. Mr Tom Ross told us, " I do sense... that there is a very strong feeling among older people about the unfairness of the current system, and quite rightly so. It does seem to be extremely unfair that those of very modest means who have scrimped and saved get nothing for it."[195] The Minister of State described the problem as "the second festering sore in the whole system". He said that "these people have a small pension, maybe not more than £8 or £9 a week, which would stop them getting the MIG...which they have saved for over their working life."[196] It is estimated that 515,000 pensioners have an income up to £10 above the Minimum Income Guarantee level.[197]

114. The Government is trying to address the problem of the 'savings trap' in two ways. The higher capital limits for Income Support to be introduced next year (see paragraph 63) will benefit an estimated 500,000 pensioners who have savings by £5 a week on average.[198] The Government has also announced that it intends to consult on the introduction of a 'Pensioner Credit' aimed at helping those with incomes just above the current Income Support level.

115. The Committee recently visited Australia where, in the absence of a contributory benefits system, more generous rules exist within means-tested benefits regarding the treatment of income and assets.[199] Recipients of the Australian 'Age Pension' have a certain amount of income disregarded (called the 'free area') before a pension is reduced. Income above this free area is reduced by 50 cents in the dollar for single people and 25 cents each in the dollar for a couple. A 'deeming' provision regarding income from investments is set at a level which enables those who invest wisely to 'beat' the deemed income taken into account. Assets, generally a person's property excluding their main home, are taken into account above a generous threshold,[200] with a tapered reduction of $3 per $1000 above the threshold. This more generous treatment of income and assets may have lessons for the UK, although one contributor to our inquiry from Australia complained of "regular and intrusive" requirements for the Age Pension regarding changes of circumstances, and the rise of "complicated schemes" designed to circumvent the income and asset tests and concomitant measures to foil such schemes.[201]

116. The Minister of State described the pensioner credit as "the missing link" between the Government's programme to deal with pensioner poverty in the short-term and its long-term strategy for pension reform: "we are make sure what we do for today's pensioners does not wreck the long-term policies for tomorrow's. We have to do it in a way that we do not say to people, 'It does not pay to save'... Whatever we do today for today's pensioners has to work to send the right signal to today's twenty and thirty year olds. The present system sends the wrong signal."[202] The importance of the pensioner credit in reconciling the Government's short-term and long-term plans cannot be underestimated. The Minister told us: "we have to send that signal across the generations. If we send the wrong signal we are in real trouble."[203]

117. Contributors to the inquiry could only give us their initial thoughts on the proposed pensioner credit, because few details are yet available. The opportunity of the pensioner credit, said Mr Andrew Dilnot, was that it raised the possibility of introducing tapering rates of withdrawal into Income Support, thus introducing saving incentive advantages. He also reminded us that, whilst the change of name might make it easier to allocate money to the new payments, "we should be very careful that we do not get confused about what is happening to the overall level of taxation as we make the transition."[204] Age Concern was worried that the pensioner credit could add further complexity to the range of means-tested assistance available to pensioners, whilst a taper could make eligibility difficult to predict and hence lead to under-claiming.[205] Age Concern also raised the difficulties of using the Inland Revenue to pay a pensioner credit, because only a third of pensioners paid tax.[206]

118. Several contributors to the inquiry made the point that, although the pensioner credit would raise still further the threshold for eligibility for means-tested assistance, there would still be the problem, intrinsic to the structure of means-testing, of those just above the threshold limit.[207] Ms Holly Sutherland explained it thus:

"I think there is a general problem with being worried about people who are just above whatever level we set at the moment, so worrying about people who are just above the MIG and doing something for them will leave another set of people who are just above the new credit and we may start worrying about them...I think the idea that there is always a group who feel neglected, who are just above the target group, does dictate that the group as a whole needs to be thought of together."[208]

119. As was discussed earlier (paragraph 84) the Government's concentration on means-tested assistance as the best means of targeting poor pensioners has also been criticised on the grounds that there are serious problems with the take-up of Income Support among this age group. The Government's own research identified two main 'dimensions' to the barriers to claiming Income Support.[209] The first was the stigma felt to be attached to claiming Income Support among some pensioners. The National Pensioners Convention argued that this was a major inhibiting factor for many pensioners: "means-testing the wrong approach, because you put people as is divisive and it is demeaning, and that is why a lot of old people will not claim, although they would be entitled to."[210] It was put to the National Pensioners Convention that the 'stigma' attached to claiming means-tested benefits might diminish, as folk memories of the harsh means-tests of the 1930s died out. This view was disputed. Mr Jack Jones said that in his experience, younger pensioners felt equally strongly about means-testing.[211] Mr Tony Lynes thought that, in the future, when it was increasingly expected that people should make their own provision for retirement, those who had been unable to do so were going to feel that they had failed.[212] If though, all pensioners were subject to means-testing, Mr Lynes said that the stigma would not attach to some pensioners and not others, as all would be in the same position: "if you are living in a system where everybody is means-tested, whether it is for income tax or whether it is for pensions, then, obviously, there is not a stigma about going through the means-test".[213]

120. The second aspect identified in the DSS research consisted of objections to, or negative perceptions of, various aspects of the claims process. The size and complexity of the application form was cited as one obstacle pensioners faced, as well as problems of physical access to the office and transport to and from it. There was a strong perception of a lack of privacy in Benefits Agency (BA) offices and that BA staff who dealt with pensioners were too young and had the wrong attitude.[214] The research found that those with the highest resistance to claiming were generally older and had significantly lower incomes, even though they reported themselves as managing well.[215] The researchers commented "the idea of having to admit to 'not managing' is an anathema to high resisters and they therefore place high priority of stringent management."[216]

121. In response to the problem, the Government has recently launched a Minimum Income Guarantee take-up campaign. Measures include a television advertising campaign launched on 30 May 2000, and sending individual letters to over 2 million pensioners who have been identified as possibly entitled to the MIG. A new Tele-Claim Centre has been established which allows a claim made by telephone, with a tailored form then sent to the pensioner for signature.[217] At the date of the Minister of State's appearance before us, nearly 417,000 letters had been issued and 123,000 responses had been received. Figures were not yet available on the numbers of pensioners who had successfully claimed.[218]

122. Despite their preferences for a higher basic state pension, most pensioner organisations have welcomed the Government's take-up initiative.[219] But reservations were expressed as to whether all those eligible would claim. Age Concern said. "whatever efforts are made to encourage claims and improve the process, in our view, take-up of means-tested benefits will always be incomplete. Unfortunately, many still feel there is a stigma attached to claiming means-tested benefit as opposed to the pension that they have 'paid in for.'"[220]

123. We were concerned at criticisms made of the detail of the take-up campaign being carried out by the Department. These included an over- emphasis on use of the telephone, when many pensioners either did not have access to a telephone[221] or were uncomfortable with prolonged telephone contact[222]; a lack of personal contact and outreach work as part of the take-up strategy which local authorities in particular emphasised was important;[223] and a lack of co-ordination by the Benefits Agency with local authorities and other organisations coming into contact with pensioners on a local basis doing, what one respondent described as "the nitty-gritty slog of identifying and persuading reluctant pensioners to claim what is rightfully theirs."[224] The Minister appeared to think that the take-up exercise launched by his Department was a one-off exercise. He told us, "Hopefully we are going to deal, if you like, and solve that problem. This is not something that the Government want to do and repeat every year once we have got people into the system."[225] Yet the experience of local authority welfare rights units appears to suggest that one-off campaigns have built-in limitations.[226] The Department's own research suggested the need for "sustained, systematic and co-ordinated activity for the various agencies coming into contact with pensioners."[227]

124. We recommend that the current campaign to encourage take-up of the Minimum Income Guarantee should not be a one-off exercise, but part of a longer term, sustained strategy to improve take-up among all those who are eligible .

125. There were two particular groups of pensioners with potential MIG entitlement about whom we became concerned during the course of our inquiry. The first were pensioners with care needs, whose entitlement to Income Support was dependent on a prior successful claim for Attendance Allowance. The Money Advice Unit at Hertfordshire County Council, drew our attention to the link between the two benefits: "Many of the pensioners we have seen are entitled to Income Support by virtue of being severely disabled. In order to prove this, they have to be assisted to claim Attendance Allowance as a prelude to an Income Support claim. The MIG adviceline will miss this approach entirely. This will severely disadvantage the most disabled pensioners, who will be told that they are not entitled to Income Support, when they may be once Attendance Allowance is claimed. It will also make them more resistant to future efforts by organisations such as our own."[228] As was discussed earlier, the problem of non take-up of Attendance Allowance among pensioners is seen as a serious problem by a number of disability organisations.[229]

126. A take-up campaign for Income Support among pensioners cannot fully succeed unless undertaken in tandem with identification of those eligible for Attendance Allowance. We recommend that the DSS work more closely with local government and local pensioner organisations to identify pensioners who are eligible for Attendance Allowance and who therefore qualify for Income Support, and to encourage them to claim both benefits.

127. The second group of pensioners with potential MIG entitlement whom we felt were at risk of being overlooked were pensioners from ethnic backgrounds. There is some evidence that take-up of benefits is lower among ethnic groups. A study among Greek Cypriots in the London Borough of Islington in the 1980s found out that two-thirds of elderly Greek Cypriots were not claiming what they were entitled to.[230] Research also indicates that how people go about getting the information they need varies from one ethnic group to another. For example, a 1993 study[231] found that the use of translated leaflets was especially low among Bengali groups, where there was often low levels of literacy in their first language. At that time, the Benefits Agency ran an Ethnic Freeline Service. This was valued by Punjabi and Urdu speakers, but was not seen as an effective way to reach the Chinese community who had a preference for face to face oral information. Overall, the majority of Chinese, Bengali, Turkish and Punjabi speaking people with experience of claiming used at least one oral information source on benefits.[232] A study in Leeds on the effect of ethnicity on claiming benefits found significant underclaiming, partly due to a lack of knowledge but also due to inaccessibility arising from language problems, fears about residence status, and also stigma within the particular communities. The authors of the Leeds study argued, "if Ministers do approve the instigation of a serious and determined campaign to improve take-up, that campaign will have to be sensitive to the complex and diverse needs of minority ethnic communities."[233]

128. The DSS carried a pilot take-up exercise for the MIG in nine areas of the country. Manchester City Council commented, "there were established minority ethnic communities within some of the pilot areas in the Minimum Income Guarantee campaign, but this aspect received little attention in the evaluation and reports."[234] Language barriers, in particular, are a potential problem in encouraging take-up. Manchester drew on its own experience of take-up work among ethnic communities to recommend that translated messages in ethnic languages should be included in take-up letters, leaflets, booklets, separate sheets or envelopes. They suggested that such messages should be brief, specific and practical, ideally offering people a phone number for further help or for an interpreter facility. This was a similar recommendation to one we made in a recent report concerning letters sent out by Medical Services in connection with medical examinations for benefit purposes.[235] The response from the Government was that such a notice "would not be consistent with current practices in other parts of the Benefits Agency".[236] We know that the Parliamentary Under-Secretary of State has since acknowledged the unsatisfactory nature of this response, which failed to address the question of whether the current practices of the Benefits Agency need to change.[237]

129. We note the comments of Manchester City Council, based on long experience of take-up work, that'development and outreach work is one of the most crucial ways to reach members of minority ethnic communities."[238] This accords with what we were told on an informal visit made to ethnic pensioner groups in the London Borough of Barnet. It would appear that many ethnic pensioners value face to face contact as the main means of communication, and are keen to see outreach workers from the Benefits Agency at their local centre to help them claim their entitlements.

130. In relation to take-up of benefits by pensioners from ethnic groups, the Minister acknowledged the importance of getting information to those groups and he undertook to look further at the possibility of advertising in the specialist press. He called such work "absolutely crucial."[239] We consider that more needs to be done to ensure adequate take-up of the MIG among ethnic groups. We recommend that the DSS should conduct research into take-up of the Minimum Income Guarantee among ethnic pensioners and into the best means of encouraging people from different ethnic communities to claim.

122   Households Below Average Income 1994-95 to 1998-99, DSS, 2000. Back

123   Q 20. Back

124   Ev., p. 33, para 3.1. Back

125   Q 58. Back

126   E., p. 5, para 6.2. Back

127   Q 71. Back

128   Q 96. Back

129   Q 64. Back

130   Ev., p. 34, para 3.3. Back

131   Official Report, 25 May 2000, col 613W. Back

132   Ev., p. 100. Back

133   Q 58. Back

134   Q 69. Back

135   Income Related Benefits Estimates of Take-Up in 1996-97 (revised) and 1997-98, DSS, 1999. Back

136   Q 58. Back

137   Ev., p. 34, para 4.1. Back

138   Q 67. Back

139   Q 144. Back

140   Q 64. Back

141   Q 77. Back

142   Q 145. Back

143   Ev., p. 5, para 6.5. Back

144   Q 25. Back

145   Q 79. Back

146   Q 261. Back

147   Q 238.  Back

148   Q 257. Back

149   Social Security Committee Fifth Report, Session 1999-2000, The Contributory Principle, HC 56-1. Back

150   Ibid, para 55. Back

151   Q 197. Back

152   A new contract for welfare: Partnership in Pensions, Cm 4179, p.30, para 8.. Back

153   Q 263. The figures cited by the Minister to restore the earnings link were: £1 billion in the first year, and £7.5 billion by 2010. Back

154   Q 257. Back

155   Q 262. Back

156   Ibid. Back

157   QQ 187-188. Back

158   Q 146. Back

159   Appendix 19. Back

160   Government Actuary's Quinquennial Review of the National Insurance Fund, July 1999, Cm 4406. See also QQ 157 -161. Back

161   Q 164. Back

162   Q 165. Back

163   Ev., p. 173. Back

164   Q 189. Back

165   Ev., p. 76. Back

166   Q 186. Back

167   Q 96. See also Age Concern, Ev., p. 9, para 10.5. Back

168   Q 143. Back

169   Official Report, 16 February 2000, col 609W. In a written answer the DSS said that the balance in the Fund over and above the minimum level recommended by the Government Actuary was likely to be £10.5 billion by April 2002.  Back

170   Social Security Committee Fifth Report, Session 1999-2000, The Contributory Principle, HC 56-1. Back

171   Ibid., para 142. Back

172   Ibid. Back

173   Q 185. Back

174   Ev., p. 38, para 7.6. Back

175   Ev., p. 9, para 10.4. Back

176   A Hedges, Pensions and Retirement Planning, DSS Research Report No. 83. Back

177   Q 259. Back

178   Official Report, 8 June 2000, c 381W. Back

179   Q 61. Back

180   Q 97. See also Age Concern, Ev., p. 7, para 8.5 and the National Federation of Post Offices and BT Pensioners, the National Association of British Steel Pensioners, and the Civil Service Pensioners' Alliance, Ev p. 147, para 24.  Back

181   Q 61. Back

182   Q 238. Back

183   Q 76. Back

184   NACAB, Ev., p. 116, Age Concern, Q 28. Back

185   Q 197. Back

186   Ibid. Back

187   Ev., p. 81, para 33. Back

188   Official Report, 11 April 2000, c 144W. Back

189   Ibid. Back

190   Ev., p. 96. Back

191   Q 283. Back

192   Q 128. Back

193   Ev., p. 7. Back

194   Ibid. Back

195   Q 128. Back

196   Q 286. Back

197   Official Report, 4 May 2000, c 213W. Back

198   Ev., p. 83.. Back

199   The information in this paragraph draws on The Australian system of social protection - an overview, Australian Department of Family and Community Services, 2000. Back

200   The threshold for a single homeowner in December 1998 was $125,750: around £50,000. Back

201   Mr James Nelson, Vice-President of the British Australian Pensioner Association, Ev., p. 98. Back

202   Q 256. Back

203   Q 279. Back

204   Q 193. Back

205   Ev., p. 8, para 8.7. Back

206   Ev., p. 7, para 8.6. Back

207   Age Concern Ev., pp. 7- 8, para 8.7; National Federation of Post Office and BT Pensioners, National Association of British Steel Pensioners, and the Civil Service Pensioners' Alliance, Ev., p. 147, paras 21 and 23.  Back

208   Q 226. Back

209   Overcoming Barriers: Older People and Income Support, DSS Research report 100, 1999.  Back

210   Q 74. Back

211   Q 101. Back

212   Q 102. Back

213   Ibid. Back

214   DSS Research Report 100, section 5. Back

215   Ibid., section 3. Back

216   Ibid., page 32. Back

217   Ev., p. 82, paras 34-38. Back

218   Q 246. Back

219   For example, Age Concern, Ev., p. 6, and the National Federation of Post Office and BT Pensioners, National Association of British Steel Pensioners and the Civil Service Pensioners' Alliance, Ev., p. 147. Back

220   Ev., p. 6, para 7.7. Back

221   Ibid., para 7.3. Back

222   Mr Jack Jones, Q 87, Hertfordshire County Council Money Advice Unit, Ev., p. 110, para 14(a). Back

223   See Hertfordshire County Council Money Advice Unit, Ev., p. 110, NACAB, Ev., p. 116, and Manchester City Council, Ev., p. 124. Back

224   Evidence submitted by Mr Gary Vaux PP8, not printed. See also Appendix 4 and Appendix 7. Back

225   Q 259. Back

226   See Appendix 4 and Appendix 7. Back

227   DSS In-House Report No. 60, p. 193, 1999. Back

228   Ev., p. 11, para 14(b). Back

229   Gary Vaux PP 8, not printed, NACAB, Ev., p. 116, Age Concern, Ev., p. 5, Disability Alliance, Ev., p. 131, and RNIB, Ev., p. 140. Back

230   Tarpey, English Speakers Only: a report of work on take-up of social security benefits with people whose first language was not English, Islington Peoples Rights, 1984. Back

231   Bloch, Access to Benefits: the information needs of minority ethnic groups, Policy Studies Institute, 1993. Back

232   Ibid. Back

233   Law, Deacon, Karmani and Hylton, 'The Effect of Ethnicity on Claiming Benefits: Evidence from Chinese and Bangladeshi communities', Benefits, January 1994. Back

234   Ev., p. 124. Back

235   Social Security Committee Third Report, Session 1999-2000, Medical Services, HC 183, para 66. Back

236   Reply by the Government to the Third Report of the Select Committee on Social Security, Session 1999-2000, Cm 4780, para 39. Back

237   Official Report, 6 July 2000, c 512. Back

238   Ev., p. 124. Back

239   Q 250. Back

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