Incentive to work will be dampened by pension reform

Sheila Lawlor
THE coalition received bad news this week, as figures revealed the UK added £15.4bn to its debt pile in December 2012 – up from £14.8bn in the same month in 2011. The chancellor will now be forced to ask ministers to prepare further cuts for 2014-15. But the problem is not just fiscal. It’s political. The coalition is extending a culture of dependency on the state, with damaging implications for Britain’s long-term finances.

Nowhere is this clearer than in its pension reform. A new single-tier pension – paying out a flat rate of £144 a week – will merge the basic pension and the earnings-related secondary pension. It’s been posed as a cheaper, simpler means of providing a reasonable retirement income to all. And it may save the Treasury some money. But there’s trouble in the detail.

Working people will have to make national insurance contributions (NICs) for at least 35 years. But those who take time off – for a series of reasons deemed admissable by the state – will have a fantasy NIC “credit” made by the taxpayer. They will then be viewed as having paid their full contribution, and officially moved onto the flat £144. Women, we are told, will be winners; so will the low-paid and self-employed.

But someone must pay for this. The usual creative accounting will not do, despite projections in the pensions White Paper. As another White Paper (this time the blueprint for the welfare state) put it, the only affordable way to fund benefits over a long period is if they’re paid for by the NICs of working people in times of earnings, with co-payments made by employers and the state. The assumption must be that every household has one breadwinner (a working spouse would pay for the non-working). It may sound unrealistic. But it’s a simple principle that should underpin the system’s affordability.

The problem is that incentives to earn and save are dampened when those who do not work can be as wealthy as those who do. As Lord Beveridge (the designing hand behind the welfare state) explained, the only affordable way to provide benefits is for non-workers to receive a lower, subsistence, amount.

And the new pension plan ignores this. Unfortunately, it’s nothing new. The reform is one example of a series of damaging changes to the welfare state, pursued by successive governments. It began in the 1940s, when Clement Attlee played politics with welfare to pay out pensions without the recipients meeting full contributory conditions. The actuarily-based fund to pay for this failed to materialise. Then, in the 1960s and 1970s, as the number of workless households expanded, the state invented a variety of cash payments from the public purse to support workless households. The trend was set. The taxpayer became paymaster, with politicians agreeable facilitators.

Today, the principle of benefits in return for contributions has been turned on its head. Those who have paid their way find themselves relatively penalised. And while most rightly want to help the destitute or struggling, it’s not feasible or desirable for the taxpayer to take the place of the breadwinner.

Sheila Lawlor is director of Politeia.