This basic fact may help to explain some of the coalition’s bad decisions. While younger families are rightly losing their universal benefits, pensioners’ universal bus passes, TV licences and winter fuel allowances remain intact. While benefits to families who are out of work are rising at 1 per cent (well below the rate of inflation), the state pension is guaranteed to grow by least at 2.5 per cent annually. While the police and services in town halls are doing more with less, the NHS – which is the most important service for retired families – has received real increases in its budget.
Politicians are running scared of the elderly voting bloc.
But this cannot continue. The same changes that make reform politically hard also make it necessary. Demographic trends mean transfers to retired families, net of the taxes they pay, keep growing. In 1990, the average retired family made an annual net gain of £5,422 from the welfare state. Only 20 years later, and adjusted for inflation, that same net gain had risen to £10,009. As this happened, the working-aged share of the population, which pays the bulk of taxes, fell. The welfare state has been turned on its head.
There may be a temptation to put off dealing with these challenges, but this will save trouble for the future. Delay will mean the political barriers to change are higher, as the perceived electoral benefit from buying the votes of the elderly increases. It will also make the transition harder, as more people will be affected and the costs of compensating losers rises higher. For families approaching retirement, the longer it takes for them to get a clear message from the government that they will need to do more for themselves, the less prepared they will be when that day inevitably comes.
But there is opportunity too. In the Queen’s Speech tomorrow, the government could lay out plans to cut the cost of pensions and begin a debate on the future of NHS funding. This would help safeguard these programmes and put the UK on a more secure footing, with families preparing for their own futures, higher levels of saving and insurance and, eventually, lower burdens on the taxpayer.
The next government will have to make tough decisions on the welfare state, regardless of who wins the 2015 general election. Waiting will just make these decisions harder.
Dr Patrick Nolan is the chief economist at the independent think tank Reform. Its report Seismic shifts in the welfare state is available at www.reform.co.uk