The Coalition this week announced radical changes to State Pension, which may in fact be more radical than they imagined or intended, with the proposals for a single tier pension of £144 per week, the abolition of the State second pension and SERPS rebate and the reduction to 10 qualifying years for a pension.
It may just be a coincidence but the pension amount is the same as the minimum that the State says a single person needs to live on and therefore the same as the Pension Credit level. Effectively this means that whether you work and pay NI or not, you will be entitled to this amount.
It is a farce, the State pension becomes just a welfare benefit and National Insurance contributions just taxation, is this the real intention? or have they not thought it through again, perhaps they believe we are too stupid to realise this or don’t care.
It contradicts all the policy aims of making work more worthwhile and essential, why bother, in fact with other side benefits you are still better off on welfare throughout your life. This amounts to the abolition of the State pension, forcing anyone who wants a comfortable retirement to make additional contributions, which will lead to the eventual means testing of any basic pension from the State.
It is a great pity that the State cannot manage National Insurance more effectively, the income amounts and potential are large, but are absorbed by payments to pensioners and the sums do not add up. If all the ten million over 65 were paid the proposed basic amount of £7,500 per year, the total cost would only amount to three quarters of the present pensioner spend.
Yet the future is grim, population projections show that ratio of pensioners to those in work, which as at present 3 to 1 would at least halve so that those in work will be unable to afford to keep the rest of the population, particularly the retired. The only solution is the self sufficiency offered by a funded scheme.
If all in work carry forward their own adequate pension pot into retirement, then the demographic burden of age dependency disappears, this would need well managed Pension funds, which are likely to be more effective outside the present State and even present Financial Institutions, i.e. independent Mutual Pension Societies.
The new State proposals move away from the basic and sensible principles of pension provision, which is to put money aside for your future retirement, this was the basis of the National Insurance contributory scheme, which will now retain the contributory aspect but nothing else, raising the questions what are we paying for and who and why?
The amount required in pension contributions to meet a pension of £7,500 in a direct contribution pension saved over 40 years is some £4,000 per year, which could be halved or even less in a well managed benefit scheme, requiring a fund of £125,000.
However if the saving period is only 10 years, there would be little accumulated growth and savings would have to build up such a fund over this short period, needing some three times this contribution.
It is therefore virtually impossible to earn this level of pension with a 10 year limited saving period, if the lower paid Ni contributions are also taken into account, there will be a high level of pension wealth redistribution. This undermines the basis of any contributory scheme, which when combined with the unfunded nature destroys it.
Savings in any form are intended for the benefit of the saver, their dependents or anyone else specified, pensions are no differrent, they are not a charity, particularly when there is no guarantee that the money will be there when needed in forty years time.
National Insurance contributions should be returned to their owners and the original purpose for which they were intended, if the State cannot manage matters in this manner, they should transfer them to someone who can. If half of NI income were treated in this manner and invested in a funded scheme, everyone would gain.
Prospective pensioners would see their NI contributions accumulate and grow, with the security that the funds were there for their use and see some return from their deductions; the State would have costs linked to income and pensions free of demographic pressures and there would be the added bonus of large funds available for UK investment to give growth and job security.
The level of NI refund or rebate would allow the minimum pension level, with sufficient excess to fund elderly care and wealth redistribution to allow this general base level for all in work, with extra related to amounts paid..
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