A senior member of the OECD has suggested that the state pension should be scrapped for the top 5-10% of UK earners in order to free up cash for the worse off.
The deputy director of employment, labour and social affairs at the think tank, Mark Pearson, is reported by the Financial Times as suggesting asset-testing state pension entitlements as a way to cope with the economic pressures of an ageing society.
Currently, state pension payments are not calculated according to assets or wealth, but rather from years of National Insurance contributions.
The issue, as far as pensions expenditure is concerned, is that there are more and more people old enough to claim pensions, and fewer (relatively speaking) still working and paying into the pot.
This presents a dilemma, Pearson explained: “Faced with these pressures, are you going to ask people of working age to pay more, or people to work longer before they can claim their pension?”
There is, however, a third option, he argued: restructure the entitlement system so that the money goes “those who really need it, to ease the tyranny of the maths”.
“Giving less to the people at the top,” he said, “would free up resources to increase general benefits.”
Pensions expenditure makes up around 40% of the total government welfare budget each year, and so any reduction in spending would free up money for other services. It has been suggested that Theresa May is considering reducing some pensions expenditure and funnelling the savings into social care.
Compared to the rest of Europe and indeed the rest of the world, the UK’s state pension entitlements are pretty low. Currently, the basic state pension in the UK is worth £6,359 a year, and the new state pension
According to a study published by the OECD back in 2015, an average earner in the UK could expect to receive a pension worth just over 38% of their former salary. This goes up to 69.4% for low earners (those who earn half what average earners do). This puts the UK ahead of only four other OECD and G20 countries (South Africa, Indonesia, Mexico and Chile).
In France, for example, an average earner and a low earner could expect to receive a pension worth 67.7% and 66.9% respectively of their former salary. In Austria, both breach 90%.
Pearson reiterated this, saying “the UK pension is pretty low”.
He also argued in favour of scrapping the current ‘triple lock’ system, according to which the state pension will increase every year either by 2.5%, in line with average earnings growth, or in line with inflation, whichever is higher.
The system unfairly benefits pensioners over and above the rest of society, according to Pearson, and should instead be replaced with a ‘double lock’ system, removing the 2.5% minimum increase.
The debate about the pensions triple lock has played centre stage recently during the general election campaign. While Theresa May is yet to confirm her stance on pensions policy, she is thought to be giving serious consideration to the idea of a double lock. Labour, meanwhile, remain committed to the triple lock. The party’s campaign chief Andrew Gwynn said: “At today’s prime minister’s questions, Theresa May talked about the triple lock like it’s a thing of the past and, under the Conservatives, it risks being consigned to history.”
Former pensions minister Baroness Ros Altmann, on the other hand, is in favour of reform. She said: “The triple lock has done its job…From an economic or social perspective, the 2.5% element never made any sense; it was arbitrary”.