Higher pensions, more poverty
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Donald
Hirsch. New
Statesman. London: Oct 13,
2003. , Iss. 16; pg. 14 |
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In
the 1990s, the Tories told us (through the musings of Michael Portillo) that
we'd all better start saving for our retirement because the state pension
would eventually become "nugatory". Now they promise the reverse:
to peg pensions to average earnings rather than prices. This pledge taps into
a growing yearning by the middle classes, as well as the poor, in these days
of uncertain stock markets and deteriorating company pension schemes: to have
at least some pension they can rely on. What the Conservatives have not
mentioned, however, is that their proposals could actually lead to a
substantial increase in poverty. At
present, single pensioners get L78 a week in state pension, but if their
other income is low they can apply for a top-up or "pension
credit", guaranteed to raise their total income to at least L102. Under
the present government's policies, this means-tested element will become ever
more important, as the L78 is being uprated -with prices only, but the L102
rises with average earnings (for the current parliament at least). The Tories
propose simply to reverse this formula: the automatic pension gets uprated
with earnings while the means-tested level is allowed to stagnate in real
terms, rising only with inflation. This would gradually reduce the
means-tested element, until eventually (probably in the early 2020s) the
state pension catches up with the minimum income guarantee, and meanstesting
is no longer needed. For
a middle-class pensioner, this is quite helpful: the state pension has
declined from 26 per cent of average earnings to 16 per cent today; the new
proposals would at least peg it at 16 per cent, giving a reliable if modest
base of retirement income. For the poor, the story is less rosy. Those who
claim the minimum income guarantee - and three-quarters of those entitled are
estimated to do so - today get roughly 21 per cent of average earnings; this
puts them somewhere close to the recognised poverty line of 60 per cent
median household income. But by freezing the guarantee in real terms, the
Tory proposals would steadily reduce the relative income of this group, until
eventually they would have to survive on 16 per cent of average earnings - a
quarter less than today. By failing to share in growing prosperity, they
would again sink deep into relative poverty.
The
Conservative proposals sound attractive partly because they try to address
fundamental difficulties with means-testing - incomplete take-up, stigma,
disincentive to save for retirement. A consensus is growing that the
non-means-tested element of retirement income must be improved. These
proposals will help strengthen that consensus, but do not on their own
resolve the dilemma of how to avoid both meanstesting and poverty. They would
eventually allow people to live on lower relative incomes in retirement than
they have had to manage on for half a century - since the earliest days of
the welfare state. |