How exactly will IDS pay for his flat pension scheme?

9:20 am - March 9th 2011

by Nigel Stanley    

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There are powerful arguments in favour of a simpler flat-rate pension of the kind outlined by Iain Duncan Smith yesterday.

The question is who is going to pay for it. Who will win? Who will lose? We do not know the answers to these questions yet. Simplification is always a good thing in principle, but in practice is almost always much controversial.

The strongest argument is that it would mean the majority of the population would get a pension from the state that would take them above current means-testing levels.

In addition, few people understand the state second pension or have much idea whether they will get one or how big it will be. Rolling it into the basic state pension is therefore an attractive option.

But it is far too soon to pass judgement on whether this government’s proposals will be progressive. A flat-rate pension carries a hefty bill.

Probably the best work on this is the research carried out by the Pensions Policy Institute (pdf), which suggests that a flat rate pension based on Labour’s slightly more ambitious target of £153 a week would cost £25 billion if introduced in 2017.

This would take the cost of the state pension and related benefits from 5.5 per cent of GDP to 7 per cent.

While even with this there would be winners and losers, it is hard to believe this Chancellor is planning such a big increase in the cost of pensions. The question therefore is how will this be paid for.

The pensions gossip has been that the Treasury has been blocking a Green Paper originally planned for the run-up to Christmas, but it looks as if they have dropped their objections. Perhaps they have suddenly found a new pot of money by following the pigs flying over Downing Street. It’s more likely that the DWP have had to offer up sacrifices elsewhere.

This is a move that it would be good to be able to cheer. I’m sure pensions minister Steve Webb has the best intentions on this, as someone with a good track record of supporting progressive state pension reform.

But I’m staying cautious until I can read the small print.

(And incidentally I have deliberately not cited encouraging pensions savings by minimising the risk of losing benefits through means testing as a key benefit. It is true that it would end the pays-to-save problem for most people, but I think many on the right exaggerate its deterrent effects)

A longer version of this article is here.

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About the author
Nigel Stanley is an occasional contributor to Liberal Conspiracy. He is the TUC’s Head of Campaigns and Communications. He's also at the ToUCstone blog.
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Story Filed Under: Blog ,Conservative Party ,Economy ,Equality ,Westminster

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Reader comments

The simple answer is he won’t. No details or timetable mean this will be perpetually kicked into the long grass until such time as galloping inflation renders £140 worth less than the existing pension, though the cuts made elsewhere allegely to finance it will be made with great enthusiasm. Yet another piece of pointless headline grabbing by a complete buffoon who imagines he is a great reformer. Smith’s delusions mean he is one of the most dangerous men in this rancid government

The devil will certainly be in the detail on this one. Presumably the most progressive option would be to ‘claw back’ some of the additional money paid to better-off pensioners through the tax system; otherwise you end up in a situation where better-off pensioners actually get an income boost from the higher rate, while poorer pensioners basically just get their existing state pension and pension credit rolled into one payment.

But of course, the more you do to mitigate that *unintended* consequence, the more you mitigate the *intended* consequence of making sure it pays to save for your retirement. Plus raising taxes for pensioners is a pretty hard sell.

Potentially working-age people and children will end up picking up the whole bill for this through lost benefits and services, and much of the extra money will end up in the pockets of people who have more-than-adequate private pensions of their own. Then the question becomes: is that a price worth paying to ensure that a) the one-third of poor pensioners who don’t/won’t/can’t claim the means-tested benefits they’re entitled to nonetheless get a decent basic income and b) you’re sure to end up better off if you save for your retirement?

There are two types of benefit recipient:
a) Pensioners, who tend to a) vote Tory; b) be reasonably well off.
b) All other benefit recipients, who tend to a) vote Labour; b) be poor.

I’m absolutely shocked to see the Tories increasing payments to pensioners, who vote for them. And I absolutely can’t imagine where the government would make the cost savings: it would be a slur on their honour to suggest that they might do so by screwing over the poor, who didn’t vote for them and never will.

I have a cunning plan as to how to make this workable.

Calculate a basic benefit (£140 / week, whatever), work out what you propose to increase it by (CPI / RPI / NAE / 2.5%), then do a one-off calculation for everyone in the UK who has any existing entitlement (State Graduated Pension Scheme, SERPS, S2P, widow’s allowances, etc.), and express it as a % of the basic benefit.

Then cancel everything else with effect from 6th April 2012 and pay the basic benefit.

So, if you are lucky enough to have some entitlement to SERPS and S2P, you might get 140% of the basic benefit. Some people will still lose out, and some will gain, as the rates of increase for each component part are different, but tough shit – it’s likely to be minimal in the grand scheme of things.

Set a default state pension age and stop pissing about with it; remove winter fuel allowances and all the other small benefits that cost a fortune to administer (and that the most needy often fail to claim) – simplify or die!

Paying for it is simple.

Raise the pension age.

Which is something we should be doing anyway…..78 sounds about the right age, average age of death.

@John B

Maybe the solution is for poor people to vote Tory, so the Tories need to do what’s in their interests?

A lot of working class people vote Tory too, you know. It’s not all fucking Labour among the masses, you deluded bourgeois twat.

@6 I know some of those working class people that vote Tory. They unquestioningly believe everything the Sun/Star et al print.
Though to be fair they only vote Tory when the option to vote English democrats/ukip/bnp isn’t on the ballot…

In effect it’s being paid already with top-ups. By paying a flat rate, however, there is a huge saving on administration. The next step, but the Conservatives (sorry Coalition!) haven’t got the guts, is to get rid of employee National Insurance and include it within income tax, and hence get rid of the complications of pensions calculated by NIC contributions. But they won’t, because then the public will see how much they really pay in tax on their incomes!

Here’s another thought: why not run a piece on making personal allowances the same as the minimum wage? It’s clearly ridiculous to have a wage that is deemed ‘minimum’ and then taxing and NI’ing the hell out of it.

13 years of Labour no-one ever asked the question “so where’s the money going to come from?”

The money for this comes mainly from the fact that the state pension age is increasing and also, in time, will come from administrative savings. Means testing is expensive – no means test means more money to give out.

“Here’s another thought: why not run a piece on making personal allowances the same as the minimum wage?”

Because that’s an Adam Smith Institute/UKIP policy.

Much, much, more important for Sunny to have pieces that push his tribe’s ideas than just good ones you know.

That’s politics after all.

wonders about John B’s point…from what I understand, the IDS proposal actually increases the amount paid to the people who have not saved…so he is helping those characterised as labour voters.

Hi people,
something you should be aware of coming soon, if the Welfare Reform Bill going through Parliament is passed in it’s present form.

Welfare Reform Bill Explanatory Notes:

Page 22
145. Paragraph 64 amends the State Pension Credit Act 2002 so that a member of a couple who has attained the qualifying age for state pension credit may not receive state pension credit if the other member of the couple has not attained that qualifying age. This is to ensure that all claimants who have not attained the qualifying age for state pension credit are required to claim universal credit and, if appropriate, be subject to work-related conditions of entitlement.

And in the Welfare Reform Bill itself,

Page 113
State Pension Credit Act 2002 (c. 16)

Paragraph 64 In section 4 of the State Pension Credit Act 2002 (exclusions), after subsection
(1) there is inserted—

“(1A) A claimant is not entitled to state pension credit if he is a member of a couple the other member of which has not attained the qualifying age.”

This of course will have a big impact for people on Pension Credit who are already struggling with the winter fuel bills and rising costs, so let’s start contacting our MP’s now to protest before it gets passed.

Reactions: Twitter, blogs
  1. Liberal Conspiracy

    How exactly will IDS pay for his flat pension scheme?

  2. Philip Painter

    RT @libcon: How exactly will IDS pay for his flat pension scheme?

  3. Will Straw

    This blog from @libcon asks the right question about IDS' pensions proposal: how will it be paid for?

  4. Will Straw

    Some reading on IDS' pensions plans & #Murnaghan

  5. BendyGirl

    RT @wdjstraw: Some reading on IDS' pensions plans & #Murnaghan

  6. old_chap

    RT @wdjstraw: This blog from @libcon asks the right question about IDS' pensions proposal: how will it be paid for?

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