Examination of Witnesses (Questions 82
- 99)
WEDNESDAY 6 MARCH 2002
MR ANDREW
DILNOT, CBE AND
MR TOM
CLARK
Chairman
82. Ladies and Gentlemen, may I open this morning's
formal evidence session and welcome Andrew Dilnot and Tom Clark
from the Institute of Fiscal Studies. Andrew is a valued colleague
who has helped us enormously with our inquiries in the past. We
are studying the Government's proposals for the State Pension
Credit. The IFS have submitted a very useful and thought-provoking
piece of written evidence for which we are grateful. You are a
seasoned campaigner in this game; I do not need to tell you what
we are looking for from you this morning. We have a series of
questions, which we should like to run through, but perhaps you
would just set the scene a little and introduce the work you have
been doing and in particular what Tom Clark has been doing. Most
people have given a qualified welcome to what the Government is
doing. What we are really interested in at the beginning is what
the upsides are and, what the downsides are, as you see them,
as briefly as is possible in an issue as technical as this.
(Mr Dilnot) Thank you very much. It is
lovely to be here again. Tom Clark, a Senior Research Economist
at IFS, is with me and he has done an enormous bulk of the work
in the paper we have submitted on the Pension Credit. The Government
introduced the Pension Credit and needed to introduce something
like it because of the very significant increase in what has become
the Minimum Income Guarantee (MIG)—for the sake of clarity
let us call it the Income Support line for pensioners. The single
most progressive, in terms of income distribution, change that
the Government introduced in the last Parliament was the very,
very large increase in the Income Support level for people over
retirement age. The consequence of that was that the gap between
the Basic State Pension and means-tested benefits grew very significantly
from £6 or £7 a week to more than £20. That meant
that the problem, which had always existed in a system that combined
both universal and means-tested benefits, of the consequences
of such a regime for people's private saving became much more
severe and was likely to become more severe still as the Government
had committed itself in the short term pretty strongly to increasing
the Income Support line, whatever it is now called, in line with
earnings. Whereas the Basic State Pension went up in line with
prices, meaning that the gap between the means-tested benefit
and the flat rate benefit would continue to grow. What are these
problems? Really two. The first is a problem of fairness, that
the Government and others are concerned that if you have two pensioners,
one of whom has managed through painful thrift to acquire a small
amount of savings and therefore has a small private income and
another who, despite having had the same circumstances chose not
to, in the regime with much more generous means-tested benefits
and 100 per cent taper there is no difference in their final income
in retirement and that just seems unfair to the Government and
many others. The second concern was more an efficiency concern
that if we have a regime like this where the means-tested component
is growing and growing very rapidly, then the incentive for people
who are only going to be able to achieve a small amount of saving
may be taken away and that does not seem desirable either. The
Government has announced a reform, it has had many names, the
components of it I fear, I confess, I even give the wrong name
to from time to time. The best way of characterising it is that
we have seen a big increase in the Income Support level and we
are now seeing a reduction in the Income Support taper for pensioners,
from 100 per cent to 40 per cent. Instead of being a world where
the means-tested benefit has a 100 per cent withdrawal rate, we
are moving to one where it has a 40 per cent withdrawal rate.
There are some associated complications and changes to the capital
rules. Adjustments to the means-tested benefit make sure that
people benefit in full, even if they are on Housing Benefit and
Council Tax Benefit but essentially we are increasing the generosity
and reducing the taper. The consequence of that is spending quite
a lot of money; it is roughly twice as expensive as Tom's initial
estimates because the initial estimates he produced last year
were based on the assumption that the Government would not be
really, really generous and make sure people on housing and Council
Tax Benefit gained in full. The Government is now doing that and
the consequence of that is a cost of about £2 billion. The
consequence of that is increases in income; increases in income
for those on lower incomes, which are much higher than increases
in income for those higher up. It is the case that this will be
fairer in the sense that people with a certain amount of private
income will now keep more of that private income than would otherwise
have been the case. It is not absolutely clear what the impact
on the savings behaviour will be, partly because by being more
generous we are spreading means testing further up the income
distribution, so although on average we are reducing withdrawal
rates, we are introducing higher withdrawal rates for a smallish
group further up the income distribution. Also, because by offering
people a higher income if they save a certain amount we may lead
to a world where people say they do not need to save quite so
much, they are being guaranteed a certain amount of income from
the state, we cannot be sure what the impact upon savings will
be. We are going to see a growth in the number of people entitled
to means-tested benefits and in the end it means the question
of compulsion in pension saving will rear its head because otherwise
governments will face the concern that people will simply choose
not to save as much as they otherwise would.
83. That is very useful. I was struck by the
fact that your submission was one of the few that really majored
on the effect on women because of the 60 to 64 age gap. Could
you just say a little about your view on that, what you think
the Government's rationale is and just how serious a problem that
might be for women in that age group?
(Mr Clark) Looking at the long-term projections the
Government published, it says in there that there is this age
60 Minimum Income Guarantee from now but it will be raised to
65 for both men and women in 2020 to match the increase in the
retirement age.
84. Is it 2020?
(Mr Clark) I do not know whether it is published Government
policy but in the work officials did on estimating the long-run
costs they have made that assumption. (Which might be indicative
of what is planned for the long term.) One clear reason to restrict
it to people of 65 and over is that if you have a long-term means
test—a once-every-five-years type of means test—and
you try to assess pensioners as soon as they get to 60 for that
and leave their income fixed, then there is a danger that people
might reduce their income by leaving the labour market at the
age of 60. A lot of people at that age might still have labour
market connections. For example we could think of supply teachers
who could retire at 60 then leave their formal job and go back
on a supply basis with a much higher income after using the interim
period, in effect, to give themselves five years' of fixed Pension
Credit entitlement. If you really want a simple and once-every-five-years
means test it seems to me that you have to try to focus that on
people who are well above the age where they are likely to have
strong attachments still to the labour market and that seems a
strong argument for doing it at 65 rather than 60.
85. But women would be the principal group who
would be caught because they did not have the National Insurance
contributions or whatever. Explain to me why you think it is a
particular problem for women.
(Mr Clark) It is more of an issue for women in the
sense that the state retirement age is 60 for women at the moment
so more women will leave work at 60 and therefore will not be
working. At the moment, if there were no need to treat men and
women differently, it might be that people would want to introduce
this thing and say let us have it at one age for men and one age
for women until we have equalised the retirement age. There is
European legislation which means that might be a problem, so you
have to pick one age and, for the reasons I mentioned, maybe 65
looks a better one so that you do not get people artificially
reducing their income.
Ms Buck
86. A lot of questioning is going to focus on
the savings incentives but obviously the objective for the Pension
Credit is to tackle pensioner poverty as well as promote the saving
incentives. The National Pensioners Convention were quite critical
of that objective, how realistic it would be for the Pension Credit
to tackle pensioner poverty, in fact they explicitly said that
it is "not the sole or even the main aim" of the Pension
Credit. Your memorandum seems to imply that it would have the
effect of roughly halving the number of pensioners living below
the unofficial poverty line. So can you explain why you think
the National Pensioners Convention has got it wrong and just talk
us through your analysis of how the Pension Credit is going to
contribute to tackling the pensioner poverty side of the dual
aim?
(Mr Clark) In order to tackle pensioner poverty, where
poverty is defined as having an income below a particular line,
you need to increase the incomes of people below that line. If
the Pension Credit does what it is really intended to do, then
a lot of people with low incomes are going to see their incomes
increase, so some of them would be moved over the line, and poverty
as measured by the semi-official line will be reduced. The estimates
we produce in here assume that the system works as it should and
everyone who is entitled to this benefit is going to claim it.
That is quite a strong assumption. We know that around one quarter
or perhaps slightly more, I forget the numbers, of pensioners
who are entitled to some income support at the moment do not claim
it. If that persists into the future, then the effect on pensioner
poverty is going to be commensurately smaller. The Government
has come up with a few suggestions about how it might simplify
the means test. I have already mentioned a move to a once-every-five-years
test rather than a weekly test and that might perhaps encourage
more people to apply. It might also be the case that if we move
from a world in which it is only the poorest third of pensioners
who are on means-tested benefits to one in which more than half
the pensioners are on means-tested benefits, then the old idea
that stigma deters people from applying for those benefits might
cease to be applicable. It will no longer be seen as something
which marks you out as an impoverished case. These are really
big, open questions and it is very hard to come up with robust
evidence one way or the other.
87. The robust evidence you have produced in
your own memorandum is that the distributional effect will be
heavily skewed towards the poorest pensioners. Is that right?
(Mr Clark) Yes, that is right, assuming that —
88. Yes, based on assumptions. I understand
that. Have you done your own analysis? Just comment briefly on
this non-take-up question in terms of who you believe are the
people who were not making the claim. That clearly is central
to this whole point and to the point about Pension Credit. Is
it the poorest pensioners who are not claiming because of ignorance?
Is it people who would only benefit by a very small amount who
are not claiming because the means- test process is not worth
the candle? Who do you think is not claiming and therefore who
do you think would be most at risk possibly of not taking up the
Pension Credit?
(Mr Dilnot) We have not done anything very recently
on this. Work we, and others, have done in the past suggests that
not taking up is related to a range of things, for example age.
The older you are the less likely you seem to be to take up. In
the case of pensioners that is strongly related to widowhood and
gender; very elderly women are particularly unlikely to take up.
It is also related to the size of entitlement. The smaller your
entitlement is, the less likely you are to take up and therefore
the more complex the system is, the more benefits there are trying
to deliver a given level of benefit, the less likely you are to
take up. One of the key issues here is, therefore, the structure
of the means test and the idea of initiating a means test when
people get to the age of 65 and then doing it once for a five-year
period. This means that at least once people are in the system
it will not be a matter of re-applying and complexity every year
and that should help. The fact that it should be occurring to
everybody at the time that they hit 65 should help as well; the
particular way in which Government manages to initiate claims
from people will matter a great deal there. One would hope that
once people get into the system, they should not fall out. There
may be an issue that people may become entitled as they go through
retirement. You could imagine a world where somebody retired on
what seemed like quite an adequate pension, certainly a private
income which was enough to take them beyond the Pension Credit
regime were they to live for 20 years in retirement, and their
private retirement income were, say, only price indexed, while
the Pension Credit thresholds were earnings indexed, and over
20 years that could significantly increase that level. So finding
structures to capture people who become newly entitled during
their retirement will be very important.
89. If you had a message to give the DWP about
how to reach the poorest pensioners and make sure that this works
for pensioners, what would it be?
(Mr Dilnot) The very poorest pensioners are currently
Income Support recipients and the take-up amongst the very poorest
pensioners does seem to be quite high. The key thing is to try
to move the initiative for initiating claims as much as possible
to the Department, which knows who old people are and, by and
large, ought to know where they live and avoid getting into a
situation where particularly poor or very elderly pensioners are
trying to have to work something out for themselves. Having a
programme of five-yearly assessments makes it far more plausible
for the Department to have the resources to do that reasonably
accurately.
90. This Pension Credit has a dual aim but just
concentrating on the pensioner poverty, if you had to devise an
approach which would help tackle pensioner poverty, is this a
reasonable way to do it?
(Mr Dilnot) You have to see the Pension Credit in
the context of what used to be called Income Support, which is
now called Minimum Income Guarantee, that is going to be rolled
up into the Pension Credit. A strategy which says we want to help
the very poorest pensioners by increasing the basic means-tested
benefit line, where the Government has now done a great deal,
is certainly the most effective way of increasing the incomes
of those on low incomes. One of the consequences of that is you
do then have some equity and efficiency problems associated with
the scale of that means testing. I certainly think if we are going
to have means testing, which delivers an income that is much higher
than the flat rate Basic State Pension, then a 100 per cent withdrawal
rate looks quite difficult to sustain. A corollary of a big increase
in the means-tested benefit level is thinking very hard about
reducing the taper, whether 40 per cent is the right taper or
not. If it were 50 per cent then you could be more generous or
it could be cheaper. If it were 30 per cent you would be less
generous and it would be less generous at the bottom but take
it further up the income distribution. One cannot say with certainty
what the right rate is but, as a general strategy, it seems to
be coherent if the way forward is to go down the means-testing
route.
Mr Mitchell
91. I should know the answer to this but I do
not. Perhaps you can just help me. If I understand correctly the
number of people who are going to be part of the means-testing
regime was, in about 1979, getting towards 60 per cent—55-57
per cent. It then went down to about 38 per cent by 1997 and it
is now heading up towards 57 per cent again. Can you just remind
us what the figures are?
(Mr Dilnot) Is this amongst the post-retirement age
population?
92. Yes.
(Mr Dilnot) I do not have that.
(Mr Clark) What I have here are the numbers who are
entitled rather than the actual numbers.
93. I just very quickly want to get a feel for
the scale.
(Mr Clark) The reform, which is due to come in in
2003, increases the number of people aged 65 or over in families
who are on Income Support or its successors from about 32 per
cent to 52 per cent and the total number on any means-tested benefit
or entitled to any means-tested benefit, that is Council Tax Benefit
and Housing Benefit as well, increases from 53 per cent up to
61 per cent as a result of this reform.
Mr Dismore
94. Is that both MIG and Pension Credit as it
is now? At the moment roughly three million pensioners are on
MIG or entitled to MIG. Afterwards it will be five million entitled
to MIG or five million roughly entitled to MIG, plus Pension Credit.
(Mr Clark) That sounds very roughly right. This is
just people aged 65 or over, rather than people aged 60 or over,
because I was just trying to get at the effect of this reform.
(Mr Dilnot) MIG and Pension Credit is five million.
95. So in rough terms around five million.
(Mr Clark) It comes out at 52 per cent of the 8.5
million population aged 65 or over, so it is around 4.3 million
people in this age range.
Mr Stewart
96. May I touch on incentives to save? Figures
you produced in your memorandum for the effect of the Pension
Credit seem to show that there will be a very positive effect
on individuals' effective marginal tax rates, by which I mean
how much an extra pound of pension/savings income is lost through
loss of means-tested benefit. Do you agree with the Department
that in future it will always pay to save for retirement?
(Mr Dilnot) We need to be very careful here. The Department
necessarily wants to make the point that if you have saved you
will have a higher income as a result of it and that is true,
that is the consequence of having a lower taper rate. It definitely
is the case that if you have saved you will have a higher income
than you would have done, if you had not saved. That is not always
true at the moment because the 100 per cent taper can mean you
do not have a higher income than you would have done if you had
not saved. It is true that overall the impact on marginal deduction
rates seems to be that they fall and certainly people facing 100
per cent marginal deduction rates fall very dramatically. Two
more points need to be made. The first is that a range of people
who are not at the moment entitled to any means-tested benefit,
as a result of the introduction of the Pension Credit which spreads
means-testing further up the pensioners' distribution, become
entitled to a means-tested benefit and that number may well grow
in the future if the MIG is earnings indexed, so will take it
even further up the income distribution. The consequence of that
is that better and better off pensioners will find themselves
in the position where if they reduce their saving by one pound
the reduction in their future income will be lower than would
be the case under the current regime. Particularly amongst the
potentially better off pensioners we are actually reducing the
incentive to save in that way. So that might be particularly important
in terms of the overall aggregate level of saving that pensioners
do, because they are likely to do more saving than those lower
down. We cannot unambiguously say what the overall impact on the
incentive to save will be, while we can unambiguously say that
pensioners who do save will in future be better off than they
would have been if they had not saved, which is something you
cannot say now.
(Mr Clark) The only thing I would add is that when
I first looked at this, before we knew what the Government were
going to do to Council Tax Benefit and Housing Benefit, we had
an awful lot of pensioners who ended up being on a 91 per cent
effective marginal rate because they were in receipt of all three
means-tested benefits at once. By the increases they have announced
in Housing Benefit and Council Tax Benefit, for the moment, they
have largely got rid of that group: very few people are going
to end up being on all three benefits at once. The immediate impact
on marginal effective rates, the money people actually get from
the saving they have done, is broadly speaking positive, although
looking forward into the longer term that is much less obviously
the case because we expect the number of pensioners who are entitled
to means-tested benefit overall to grow in the long run quite
rapidly because of this reform and people who are brought into
the system are going to face disincentives to save that they would
not otherwise have faced.
(Mr Dilnot) This is just another reminder of the inevitable
trade-off. The Government saw that had it not done what it has
done over Housing Benefit and Council Tax Benefit, there would
have been some very high marginal tax rates. What it has therefore
done is spend more money. Spending more money means raising some
tax elsewhere, which necessarily means some increase in marginal
tax rates, although very slightly elsewhere, but also spreading
lower but still much higher than now marginal tax rates further
up the income distribution. There is no free lunch here.
97. There is a displacement effect somewhere
down in the system.
(Mr Dilnot) Yes.
98. Are there any other exceptions, for example
those without a full Basic State Pension?
(Mr Dilnot) Yes.
(Mr Clark) It is possible that someone who for one
reason or another had only got a total income before means-tested
benefits of £50 a week would, both before and after this
reform, have an effective marginal rate of 100 per cent because
the reduction in the withdrawal rate is only on the income you
have over and above the full Basic State Pension.
(Mr Dilnot) So under the current regime our estimate
was that 32 per cent of the population faced 100 per cent marginal
tax rates and that falls to 5.6 per cent. So there are still some
but very few. Our sense is that that is a number which should
decline as the proportion of the retired population, which is
not entitled to a full Basic State Pension or the equivalent of
it one way and another through State Pension, through SERPS, through
partner's entitlement, is declining very rapidly. That should
not be a problem in the long term.
99. Would it be simplistic then to conclude
that the Pension Credit will encourage-longer-term savings or
are other factors involved here?
(Mr Dilnot) We cannot say it will encourage any particular
form of saving. We can say that it will reward saving much more
than the current regime does, people who would under the old regime
have faced 100 per cent marginal tax rates will by and large now
face some increased incentive to save. That is particularly the
case if they are not saving at all at the moment. The one group
we can unambiguously say faces an increased incentive to save
is people who at the moment, or under the current regime, would
not choose to save at all. They are unambiguously encouraged to
save. It is not obvious what people who under the current regime
would have chosen to save a bit, let us say somebody who was on
one of the Housing Benefit tapers, so faced a taper which was
not 100 per cent, will do. They might face a reduced taper as
a result of some of this but they will also face a higher guaranteed
income and that might lead to their deciding to save less. It
is hard to see how people who at the moment are not entitled to
any means-tested benefit and now become entitled to a means-tested
benefit and face a higher marginal tax rate have an incentive
to do anything other than save less. It is not easy unambiguously
to assert what will happen to savings as a result of this but
it is relatively easy unambiguously to say that people will keep
a larger proportion of any savings. If the "fairness thing"
is the problem, I think the Government is on a very strong wicket.
If the Government wanted to assert that this is a way of significantly
increasing the incentive to save, then it is on a much more difficult
wicket. I do not think one can say that.
|
