Why rich pensioners’ benefits should be scrapped

In recent days, both Nick Clegg and Iain Duncan Smith have made clear their opposition to the universal pensioner Winter Fuel Payment (WFP).

For those who doubted that a re-assessment of universalism for some of the pensioner benefits was politically feasible, this comes as a pretty clear message that WFP and others will be in play as the Government looks to make further economies.

In a piece earlier this week, however, Jonathan Portes, Director of the respected National Institute of Economic and Social Research, criticised the growing number of commentators in favour of means-testing WFPs. Mr Portes argued that Winter Fuel Payments and, by extension other universal benefits for pensioners, are economically equivalent to the Basic State Pension (BSP). Consequently, he says, it makes no economic sense to be in favour of means-testing them without also advocating a means test for the BSP.

But the usually impeccable reasoning of Mr Portes doesn’t wash here. First WFPs are neither politically nor economically a simple extension of the BSP. Second they were introduced in 1998 as a means-tested benefit. And third, means-testing and universalism have long co-existed in the pension system, so there is no reason why a marginal shift to the former should necessitate a wholesale restructuring of the pensions settlement as he implies.

Winter Fuel Payments are neither economically nor politically ‘just an add-on to the Basic State Pension’. The claimant groups are not identical and the eligibility rules are different. The payments kick in once a person reaches 60, not the state pension age. Then there’s a higher level for pensioners over 80. What’s more, the payments, unlike the pension, aren’t taxable. It’s not tenable to argue that these are economically a simple add-on to the BSP just because there’s a large overlap in claimants. Nor were these hand-outs intended to be seen as part of the basic state pension: if they had been they would have been consolidated into it.

Nor does history offer support for the idea of immutably universal WFPs. Back at their 1997 introduction, Gordon Brown explicitly justified the need for the payments with reference to the poorest pensioners and ‘those on the margins of poverty’. And design followed that intent: in their original incarnation these payments handed £50 to pensioners on Income Support and £20 to others. I don’t recall anyone arguing that the logic of this policy necessitated means-testing of the BSP. Why should such reasoning apply now?

That highlights the third and most important point about means-testing. Mr Portes is right to say that there is, and always has been a fundamental tension between means-testing and universalism for both working age and pensioner benefits. There are trade-offs and neither approach can be said to be the ‘right’ way to allocate support. That’s precisely why the current system already involves both universal and means-tested elements for pensioners. The basic entitlement is universal, while the £8bn Pension Credit system is there to top-up poorer pensioners’ incomes up to a minimum level.

This highlights the obvious practical solution to the means-testing versus universalism theoretical dilemma: to have a system involving some of each. It makes no more sense to say that means-testing WFPs must imply means-testing of the BSP, than it does to argue that the universal BSP implies that the Pension Credit must be made universal, at impossible expense.

Crucially, the point where means-testing begins and universalism ends is arbitrary, decided politically with reference to the pros and cons of the two approaches. Economic theory and logic have nothing to say about how we should value that trade-off. For universalism, the key negative is huge cost. Hence advocating the shift of WFP and other universal pensioner goodies into the means-tested part of the system is an entirely logical and reasonable reflection of the fact that, over the past 5 years, cost has come to weigh more heavily as a factor when drawing the arbitrary dividing lines of public spending. Mr Portes is right to argue that the system must be considered holistically, but doing so in the current fiscal environment is precisely what should lead us to a different balance between means-testing and universalism than the one we might have favoured when the good times rolled.

This post first appeared on the Independent’s Eagle Eye blog.


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