The coalition announced this week, the introduction of the Universal State Pension , which will replace the existing State pensions and benefits with a single scheme.
It is significant that this has been set at £140 pw close to the level the State says is the minimum that a single person needs to live on, the current Pension Credit level. It is also more significant that the threshold for tax and NI has been set at this level around £7,280 to £7,450 per year.
A basic Poverty wage is therefore established at which no taxes or NI are paid and for a universal Pension income. This is currently set at 30% of the national average wage (NAW).
This will mean the end of the NI contributory system, meaning that whether you pay NI or not you will be entitled to a State pension expected to be some £155 pw when introduced in 2015. NI will therefore become a Welfare Tax raising overall base tax levels to some 44%.
The State second pension will go and SERPS opt out rebate and it too bad if you have earned or depended on this from higher NI contributions over the past 30-40 years. All will become a fair, equal and grey Pensioner Society.
If you want more than this minimal living allowance, you will have to save in a private scheme set up as the favoured defined contribution scheme, currently NEST, whose outcome, like the lottery, is uncertain.
Effectively this is a State opt out of pensions and a return to the poorhouse for many. In spite of the promises, there is no guarantee that this basic pension will keep up with living costs, as many existing pensioners have found out over the past twenty years.
In fact it is unlikely that it will do so as the whole unfunded system is not viable or sustainable.
Overall this is a cost cutting exercise to potentially save some £20billion per year in pensioner costs.
Time is well overdue for those who work, earn, pay taxes, NI and save, to receive a fair deal for their efforts and full and solid guarantees for their retirement future. These should be fully separated from those who, for whatever reason, find themselves dependent on State welfare.
Of course we should maximise employment and opportunity for all, but we should not penalise those diligent enough to find it. The effort should be directed at creating jobs rather than losing them.
At NAW, individual NI contributions amount to 8.53%, of gross wage; invested over 40 years at a modest 4% growth rate this would give the same pension of 30% of NAW.
This could be the basis of the funded universal contributory defined benefit pension scheme outlined earlier and the proposed changes offer a unique opportunity to implement this and establish a secure and stable pension future.
It is time for the dependency of pensioners on those in work to end and this can only occur with a fully funded pension system which gives self sufficiency at retirement.
The cost of transition of the current proposed changes will not necessarily be different from that required for a FUDBC scheme, and similar to the transition of public sector pensions outlined earlier.
If the State meets current pension liability, as it indicates it will do, then income for such a scheme, will only be needed to build up funds and meet new pensions as they arise
Employer NI is equal to individual NI payments giving a current income with SERPS rebate of £110bn, half of which would almost meet present pension liability, leaving the State to meet the benefit side, and both will reduce as existing pensioner numbers reduce with time.
The other half as a 9% rebate (similar to SERPS) could build up to meet existing workers as they retire, to give a 30% final pension in real terms.
The proposed NEST contributions of 8%, which will probably become compulsory, would give a further 28% in pension in a funded defined benefit scheme.
At 16.5% overall this has the potential to give a 50% final pension and generate sufficient income to meet welfare pensions and even member’s health care needs, particularly if higher investment returns are achieved.
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