Select Committee on Social Security Seventh Report


131. One of the underlying difficulties in framing long term policies to tackle pensioner poverty is the absence of consensus as to the shape of the welfare state which exists in a number of OECD countries. On whatever definition, poverty is a reality for many of today's pensioners. The very poorest can claim £78.45 each week in Income Support, an amount which the Minister of State has admitted is inadequate to live on. Clearly, poverty among pensioners stretches beyond those entitled to this Minimum Income Guarantee. It also includes many pensioners in receipt of the basic state pension on dwindling fixed incomes and some savings, who are living above the MIG level, but still at very modest levels. The majority of pensioners are by no means well-off. Over half of all pensioner units are to be found in the bottom two fifths of overall income distribution.

132. Although some factors which cause poverty among today's pensioners may diminish over time, others will remain, and new risks are becoming evident. The issue of pensioner poverty is urgent for today's pensioners, but it will also require long-term solutions if others are not to be in the same position in the future.

133. The Government's starting point for long-term reform has been that people who work all their lives should not have to rely on means-tested benefits when they retire.[240] We agree with this approach. The pension system should reward people who work and save. A system in which means-testing plays too great a part can discourage people on modest earnings from making self-provision for retirement. It can lead to bitterness among people who find themselves slightly above the means-tested level on retirement, with little reward for years of work and prudent saving. This approach also appears to accord with the sentiments of a significant strand of today's pensioners who have been identified as poor, but who are reluctant to claim the MIG to which they appear entitled. Claiming means-tested benefits can be perceived as confusing, time consuming, and demeaning.

134. We have considered the Government's long-term plans for a second state pension, designed, when combined with the basic retirement pension, to enable working people on low incomes to retire at a level of income above the MIG. The aim is admirable. But, on close examination, we are not satisfied that those plans go far enough to prevent large numbers of future pensioners from ending up on the MIG. This is due partly to the qualifying conditions for a full second pension which will leave many people who have had low paid, intermittent employment with only partial entitlement. It is also due to the decision to uprate the non-means-tested second pension in line with prices only during retirement, whilst raising the means-tested MIG in line with earnings. As we said in our recent report on the contributory principle, "the danger is that pensioners who have paid National Insurance contributions throughout their working life and who retire on the state second pension will find themselves, within a few years, worse off than pensioners on the Minimum Income Guarantee."[241]

135. The state second pension does not fully come into effect until 2050. It will take until then before the combined basic and state second pension will be worth as much in relation to earnings as the basic pension was in 1980.[242] Meanwhile, pensioners who retire within the next few decades stand to receive an inadequate state retirement pension with a declining value, and an earnings-related second pension which, due to cuts made in the 1980s, will be worth considerably less in future than is received today. The Government wishes to encourage more people to make better private provision for their old age, but for older people, and those groups most at risk of poverty in old age - people with insecure working lives, and those, often women, in low and modestly paid employment - this may be difficult and may simply reduce the level of their Income Support.

136. In order to alleviate the poverty of today's pensioners, the Government has chosen to extend the means-tested safety net to an ever-growing number of pensioners. Not only have levels of Income Support been raised considerably, but those levels have been guaranteed to rise in line with earnings, during the present Parliament and possibly longer. The Government's Green Paper on pension reform said "over the longer term, our aim is that [the MIG] should rise in line with earnings so that all pensioners can share in the rising prosperity of the nation."[243] Capital cut-off limits are being raised. From next year, pensioners with savings of up to £12,000 will be eligible for the MIG, subject to the level of their income. The proposed 'Pensioner Credit,' still at the design stage, will bring pensioners with small occupational and private pensions within the MIG, by means, it is predicted, of a 'taper', enabling them to keep a proportion of their additional pension income. The costs to the taxpayer of this additional support are not yet known but questions arise about the continuing willingness of the majority of taxpayers to pay for the increasing cost of these benefits, at a time when they are being expected to make their own private provision to compensate for the decline in the value of the state retirement pension.

137. The problem we see with the Government's approach is a simple one. As the means-tested safety net encompasses more and more pensioners, it becomes harder and harder to see how the Government's long-term aim of enabling working people to retire on incomes which will not require them to be dependent on a means-test, will be realised. Index-linking the MIG with earnings does not enable all pensioners to share in the rising prosperity of the nation; it only enables those who are receiving the MIG to do so. As the MIG rises in relation to earnings, and other pensions including the basic state pension and occupational and private pensions decline in relative value because they are only uprated with prices, more pensioners will be brought into the means-tested system. The Government is looking to the proposed new pensioner credit to bridge the gap which is opening up between the Government's short-term and long-term strategies.

138. The danger in the debate on the best means of tackling pensioner poverty is to see it as

an 'either/or' question; either increase the basic state pension, or make means-tested help more generous. For some, linking the basic state pension to earnings, has become a talisman in the fight against pensioner poverty. For others, the diminishing value of the basic pension is seen as an irrelevance when considering how to help those in poverty in old age. Either approach is too simplistic. What is important is clearly identifying a target, in absolute and relative terms, as to what a minimum income for pensioners should be, (building on our recommendation at paragraph 22 for research on this issue) and developing a comprehensive strategy for getting there as quickly as possible, inevitably using a variety of mechanisms to deliver this. We note the Minister did not dissent from the Age Concern figure of £90 for a single pensioner, and in the absence of research to the contrary, believe this is a good starting point for a target, based on current figures. We consider that the Government is right to have paid urgent attention to the plight of our poorest pensioners by introducing the Minimum Income Guarantee. But equally, it cannot ignore the important role of the state retirement pension as the basic building block of pension provision, on which all others rest. If it is allowed to crumble, it undermines the other tiers of pension provision which it supports.

139. We look forward to further details of the tax credit proposal. We believe if such a scheme is to be successful, it must first enable pensioners to keep much more of their savings, perhaps looking at interest income, rather than using the value of the capital itself as part of any qualifying test; and secondly, to keep more of their income, whether from private pension provision, modest earnings, or from investments, through, for example, generous tapers. We look forward to seeing the Government's strategy for overcoming the "stigma" argument which attaches to MIG and other means-tested benefits.

140. One point which was frequently raised with us, was the way the MIG level operated as the qualifying figure for other "fringe" benefits, such as discretionary Local Authority services, free NHS dental treatment, and fares to hospital, and so on, which was also a justified source of grievance. As the proposals for pensioner tax credit come forward, we hope this aspect of the debate is not overlooked.

141. If the Government is to realise its long-term aim of giving pensioners solid state pension provision on which they can build, without their own pensions and savings being eroded in old age by means-tests, and if we are to make a start in bridging the gap towards our proposed target as proposed by the National Pensioners Convention, we have concluded that an increase in the state non-means-tested pension is inevitable and that it should be done sooner rather than later. In the long-term, the proposed state second pension will not succeed in its purpose unless it is earnings-linked; otherwise the present unsatisfactory situation, where the basic state pension is worth less than the means-tested safety net, will repeat itself. In the shorter term, pensioners retiring in the next 50 years, will see the basic first pillar of pension provision, the universal state retirement pension, reduced significantly. The reduction in value of the basic state pension, which currently provides a third of all pensioner income, will reduce the overall retirement incomes of people who have made savings and will inevitably increase the numbers brought within the means-tested safety net. We would like to see fewer pensioners in the future being required to claim means-tested protection to avoid poverty, not more. We await the details of the proposed pensioner's credit, but unless it can achieve this objective, and meet our concerns for the mid-term future, we believe that the earnings link for uprating the basic state pension will need to be restored to provide a firm financial platform for retirement on which people can build for the future.

142. This recommendation arises from our perception of the inherent structural weakness in the Government's pension reforms where, unless the value of basic non-means-tested state provision is maintained, the underlying safety net, intended to provide a minimum income, instead becomes the major form of state provision for pensioners. The recommendation is made against the widespread acknowledgement on all sides of the pensions debate that a greater share of the national income needs to be devoted to pensions. We consider that part of the extra income which must be devoted to pensions in the future should come from raising national insurance contributions to pay for the various improvements we recommend in this Report. It is a simple and effective way of ensuring that everyone benefits from higher pensions and everyone, who can afford to do so, pays for it.

143. However, on its own, this recommendation will do little to give immediate additional help to today's poorest pensioners. We have become concerned in particular at the plight of the oldest pensioners, those aged 80 and over, who, all the evidence shows, are the poorest. This is the group whose savings are likely to be lowest, who are less likely to have occupational or private pensions, and who are most likely to have fallen behind general rises in living standards due to their fixed incomes. Although the Income Support system recognises their greater needs, by raising the MIG levels at 75 and 80 years, the National Insurance system does not. We consider that there is a case for targeting help on pensioners aged 80 or over, on the basis of their age, rather than directly by means-tested benefits. The Department's own research indicates that those pensioners with highest resistance to claiming Income Support were likely to be those who were older and poorer than other pensioners. An automatic age increase to the basic state pension would avoid the need for means-testing, whilst targeting a group known to be poor by virtue of age. We recommend that in order to directly target help on the oldest pensioners who are also likely to be the poorest, the Government should raise the level of retirement pension for those aged 80 so that it is, and remains, at the equivalent level of the Minimum Income Guarantee.

240   A new contract for welfare: Partnership in Pensions, Cm 4179. Back

241   Social Security Committee Fifth Report, Session 1999-2000, The Contributory Principle, HC 56-1, para 118. Back

242   Government Actuary's Department, Response to the Pensions Green paper Chart Two, Pension Provision Group, 1999. Back

243   A new contract for welfare: Partnership in Pensions, DSS, Cm 4179, 1998. Back

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