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Should pensioner benefits be means tested?

January 4, 2013

It’s a maxim of politics that you mess with the grey vote at your peril.  Britain’s pensioners tend to vote in greater numbers than their children or grandchildren.  A switch in their opinion could easily determine an election.  But several of my Liberal Democrat colleagues are beginning to challenge this psephological wisdom by suggesting that the elderly may see some of their state benefits curtailed, at least for well off pensioners.

Deputy PM Nick Clegg has mused about the fairness of government action to cut the deficit, pointing out that so far the young and those of working age have suffered the brunt of tax rises and expenditure cuts.  Yesterday, former Care Minister Paul Burstow published a Centre Forum pamphlet ( http://www.centreforum.org/assets/pubs/delivering-dilnot.pdf ) advocating means testing of the winter fuel allowance to help cover the costs of a reform of social care funding.  To my mind, dealing with the demographic time bomb of families struggling with the costs of caring for the elderly is the biggest domestic policy challenge facing my generation of politicians. So I welcome Paul’s idea and hope it provokes a big debate.

Nick and Paul have brought together two issues.  In the short term, how can we balance the nation’s books with everyone paying a fair share? And in the medium term, how on earth do we cover rising care costs?  Here’s my take on some of  the principles and practicalities of disturbing the current financial settlement for pensioners.

Is it true that pensioners have escaped much of the government’s austerity policies?  On the face of it, yes.  The Coalition has implemented the Lib Dem policy of triple guarantee that the state pension will always increase by a minimum of 2.5% or inflation or average wage increases if they are higher.  So last year the state pension was increased by the largest amount in its history.  The winter fuel allowance has been maintained for all pensioners, at the same flat rate of £200 or £300 for those in their eighties.  The free bus pass has been kept as have free TV licences for those aged 75 and over. Pensioners with little or no income beyond the state pension get top up payments of pension credit.  This is not just useful extra money it’s also a passport to automatic council tax benefit, cold weather payments, free prescriptions and eye and dental checks.

Compare the above to public sector pay freezes for the last two years and a capped increase of 1% over the next few years.  Or the withdrawal of EMA from many college students and the increase in tuition fees, albeit with a much fairer repayment scheme.  Or the freezing of child benefit and now capping the increase to 1% and withdrawing it from high earning families.  It’s quite a stark contrast.

What about the tax system?  Pensioners have for many years had a much higher tax free income personal allowance than those of working age.  The personal allowance for pensioners in the current tax year is £10,500 compared with £8,105 for everyone else.  The working age allowance is of course only as high as £8,105 due to the Lib Dem policy of raising it to £10,000 in this Parliament, compared to £6,475 at the start. The Coalition has now decided to freeze the pensioners allowance until the working age allowance catches up, which is likely in 2015.  Labour have dubbed this temporary freeze a “granny tax”, which conveniently ignores the fact that the majority of pensioners are completely shielded from tax and none pay national insurance.

These anomalies have built up over many decades.  When you factor in other societal changes such as access to good occupational pensions there is a clear problem of inter-generational unfairness.  This issue is receiving more attention from think tanks and more thoughtful politicians. The huge future cost of dealing with care for the elderly could tip the financial balance even more against the young and those of working age in general.

I don’t think there are any simple trade offs here, in taking away a pensioner benefit and giving it to the young.  But it is silly to pretend that pensioners are all the same.  I would not for one moment want to take away or reduce benefits to the poorest pensioners.  But is a hallmark of a progressive society to give a £300 winter fuel allowance both to an 80 year old in a one bed flat in Bristol and also give it to the Duke of Beaufort, our nearest grandee with rather a lot of rooms to heat at Badminton House?

So what are the options, at least to reduce the benefits bill for richer pensioners?  First, there is a choice between means testing and taxing.  There is some means testing in the system already, to give a minimum income to the poorest pensioners.  But that affects a minority and I hope that we will move towards a good basic pension for all that will do away with means testing the poorest.  Steve Webb has long advocated this and the party will want him to move onto this area when he has completed other reforms as Pensions Minister. I think the tax system is a better option.  All pensioners with high incomes will already be within the HMRC net.  Making a cash benefit taxable could claw back at least 40% (0r 45% for the really well off) from higher rate taxpayers.  The tax return could also be used for a steeper withdrawal than the tax rate, as is being introduced for child benefit.

Making pensioner benefits taxable is easier for some than others.  The winter fuel allowance and TV licence are easy to value but what about a bus pass?  The bus pass also brings with it wider societal benefits. It makes it easier for pensioners to travel to medical appointments, or visiting family and friends.  Those that have cars can reduce their use, good for the environment.  Personally, I think the pensioner bus pass is good for social cohesion and I would leave it alone.  Inter-generational unfairness here would be better dealt with by giving a bus pass to post 16 college students.

So I think there is more scope for using the tax system to remove benefits from the richer pensioners.  This would release money either for care costs or for extra support for the young.  But I don’t want to get into a situation where the parties try and badge themselves as for the young or the old.  We know that pensioners are more likely to vote Tory but the overall greater propensity to vote means that their votes are significant in Lib Dem target seats too.  Besides, neither the old or the young look just to their own selfish interests. I know from Bristol West that students have always judged policies and parties in the round and don’t look exclusively at higher education funding when deciding how to vote. Students also have grandparents and would quickly see through any attempt to rob one section of society in order to appeal to another.

The debate about inter-generational funding is at early stages.  It needs to get more urgent.

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24 Comments leave one →
  1. January 4, 2013 3:27 pm

    “To my mind, dealing with the demographic time bomb of families struggling with the costs of caring for the elderly is the biggest domestic policy challenge facing my generation of politicians.”

    I would say it’s bringing the housing stock up to scratch, myself.

    • January 6, 2013 10:10 pm

      Yes Rob, I would agree that making housing more energy efficient (which I assume is what you mean) is also very important. The Coalition is making a good start in 2013 with the Green Deal. I hope you will work with me to promote it in Bristol.

  2. John Yapp permalink
    January 4, 2013 4:07 pm

    Stephen I am a pensioner & use my Bus pass regularly. If I was without it my car would have to be used, adding to traffic congestion, pollution & parking issues.

    Regarding the Winter fuel payment allowance. My bills are much higher now I don’t work & are home more. Why could not a “fuel credit” up to a certain level of electric or gas units, be paid direct to our fuel company of choice, rather than money paid into the bank which may not be used on fuel expenditure. It surely pays to keep elderly ones warm, than have them get ill and be a burden to the NHS.

    We give all this aid to foreign countries like India & others, who are fast bettering themselves, when all we want is life’s basics from our taxes.

    • January 6, 2013 10:17 pm

      John, as I stated in my article, I favour keeping the bus pass for all pensioners who want it. Credits to utility cos may work but that would make it even harder to restrict the benefit to less well off pensioners.
      Aid to the developing world is not just an act of altruism by a rich nation. It is in our interests for the rest of humanity to be lifted out poverty and live sustainably.

      • John Yapp permalink
        January 7, 2013 11:01 am

        Stephen, the better off pensioners will have savings accounts. Shares or otherwise. These savings are reported to our Tax collectors, directly & from our tax returns. Depending on these amounts of savings could not that determine whether a fuel allowance is paid.

        Regarding aid, we see a lot of corruption from this, the money going to individuals & not to the people. ( did you see the Claridges TV prog with all the presidents staying there from African & other nations ) We have been giving this money all my life time & so far very little to show for it but them wanting more. It fuels corruption & stops them putting their own house in order.

  3. benedict walmsley permalink
    January 6, 2013 6:25 pm

    Perhaps pensioners benefits should be means-tested in the future . It is my belief that current pensioners and those coming up to eligibility in the next few years should not be punished except in the case of those with certain savings levels and house -values.

    The new child benefit exemption rules have made tens of thousands of people earning over 50K responsible for filling in a self-assessment form . These will have to be processed by civil servants or privately contracted staff.

    • January 6, 2013 10:22 pm

      Benedict, I think taxing is easier than means testing, though it only recovers 40% or 45% from richer pensioners. As to current child benefit changes (that set a useful precedent from which lessons can be learned) anyone earning £50k is already a higher rate taxpayer and in the HMRC net for tax returns.

  4. Anna Berent permalink
    January 7, 2013 4:07 pm

    ‘Means testing’ is something that was deliberately not done on many benefits when the welfare state was being established, because it was felt that people would (irrespective of whether claiming was easy or not) fail to claim out of embarrassment. I do not understand why the winter fuel allowance and the free TV license cannot now be made taxable benefits (I would have liked to see this on family allowance too). As for the free bus pass, this cannot easily be included in the tax system but it seems likely that the really affluent – the chauffeur driven class – make the least us of this perk and it’s value in health terms of getting the old out and about almost certainly exceeds its cost.

    • January 7, 2013 8:03 pm

      Spot on Anna. In general people do a good job of excluding themself if they are wealthy.

      It is also true that at some point, as people age, they become less safe to drive, so even if they have the means, having a free bus as an obvious alternative works to lessen the risk they’ll try to keep driving too long.

      We still need better services from rural areas though.

  5. Nigel Jones permalink
    January 7, 2013 7:36 pm

    I agree mostly with Stephen and would add that the bus pass enables many bus routes to have a reasonable service that would otherwise disappear or be substantially reduced.
    I am disappointed that anyone should bring into the discussion the small budget for overseas aid; although imperfect, it has helped people out of poverty and like my point about bus passes, it also has good knock-on effects for us.

    Cllr. Nigel Jones

    • John Yapp permalink
      January 7, 2013 9:14 pm

      I suggest Nigel you Google “Overseas aid corruption”. I have no problem helping others & do so myself, but I loathe contributing to corrupt governments. Isn’t this discussion about saving money any way we can, we all know why we are in this predicament.

  6. January 7, 2013 7:59 pm

    Great to see an argument for simplification and fairness.

    I agree on the benefits of bus travel, and means-testing or taxing it would be problematic.

    If anything I’d argue for those worst hit by the ‘crunch’, the young, to get free bus travel too.

    The ideal as far as bus travel goes is to make it free for all, and to reverse auction the routes to service providers. This would increase our efficiency, improve our balance of trade and make us more competitive in the international marketplace (something we need to be very aware of with so many developing nations catching us fast!)

    Pragmatically, we should advocate putting some money into trials of universal free bus travel would be cheaper, and could be used to assess benefits in areas of congestion, and high unemployment.

    • January 8, 2013 6:30 pm

      Thanks Neale. Do you know of any examples of such free travel elsewhere in the world? I’m sceptical (there’s no such thing as free, someone has to pay through taxes) but would be interested to explore further.

      • John Yapp permalink
        January 8, 2013 6:59 pm

        Please excuse me jumping in here Stephen, I have used “Manchester Metroshuttle Free City Centre Bus Service”. Its free at point of use to all ages.

  7. January 8, 2013 9:19 pm

    We had a free Shuttle bus here in Cambridge, but recent cuts by the county council (Cons controlled) closed that down.

    Other schemes have been hit recently, such as: http://en.wikipedia.org/wiki/Fareless_Square

    Adelaide has a free, but infrequent service: http://www.adelaidecitycouncil.com/community/your-transport-options/free-connector-bus/

    Yet I’m sure I’ve heard of more substantial ones (perhaps it was Portland).

    Naturally “free” = “free at the point of use” as John points out, and yes, paying through taxes on those who benefit the most, which would mean property owners.

    One option to doing this at the moment would be by Business Improvement District being formed, and financing free buses from the increment in the rates.

  8. January 19, 2013 7:49 pm

    Chester all so has a ‘free bus’ between the Railway station and the main high street and bus stops, imagine that in Bristol between Temple Meads and Broadmead, Worst Group would have a fit

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  12. rosemary permalink
    May 9, 2013 12:40 am

    It would be mad to discontinue the bus passes. Old people need every incentive to get out and about, and not by car. This is an environmental policy and a health and safety policy, not a welfare one. It should be extended to students as far too many of them are driving cars when they don’t need to. Mothers of young children too, and commuters while we are about it. In fact public transport should be seen – as sewage is – as a public service, to purify the air, and lessen congestion, not a business. It should be electric too, or at the very least, gas powered.

    The only disadvantage I can think of is that if it is completely free at the point of use to everyone, then a minority may take to riding round and making mischief, for lack of anything else more fun to do.

  13. rosemary permalink
    May 9, 2013 12:55 am

    PS I should have thought people would welcome well off people using their bus passes, so buses don’t become ghettoes. When well off people boycott the NHS and council schools, people get very annoyed, saying these public services would be better if better off people used them.

  14. May 13, 2013 8:30 am

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  15. oxjustice permalink
    June 3, 2013 1:01 pm

    like any benefit people who need them to help get by should be able to receive them but like all these benefits have been abused by the like of some claiming while not even in the country a laying on sun lounger on the beach -benefits should be for the needy and not the rich or lazy abusers of this country ?

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