At present, people under pension age pay national insurance contributions which entitle them to two kinds of state pension – flat-rate and earnings-related. Those whose employers provide an earnings-related pension scheme can be “contracted out” of the state earnings-related pension, their NI contributions and those of their employer being reduced accordingly. Under the Government’s latest proposals, the state will no longer be involved in providing earnings-related pensions, so there will be no need for contracting out: from 2017 (at the earliest), everybody under pension age will pay the full rate of NI contributions, resulting in a big increase in contribution income for the NI Fund.
At the same time, the flat-rate element of the state pension will be replaced by a “single-tier pension” at a rate high enough, for most people, to remove the need for a means-tested top-up – the pension credit. At present, the basic state pension is only £107.45 a week, while the minimum income provided by pension credit is £142.70. As a result, according to the recent Government white paper on the single-tier pension, nearly half (about 40 per cent) of all pensioners are eligible for the means-tested pension credit – but around a third of them do not claim, missing out on an average of £34 a week. The proposed level of the single-tier pension – £144 a week at today’s prices – would be slightly above the means-tested minimum, and it would be paid without a means test.
All this, however, applies only to those reaching pension age in 2017 or later. Today’s pensioners are completely excluded. They will be left with their £107.45 basic pension, with a means-tested addition for those who claim it – and the scandal of the non-claimers will continue for decades to come.
This doesn’t need to happen. As the White Paper says, “In a pay as you go state system, funding liabilities are passed from generation to generation: the National Insurance contributions of the working population provide for today’s state pensions for their parents’ and grandparents’ generations.” The logical way to spend the increased contribution income resulting from the ending of contracting out, therefore, would be to extend entitlement to the single-tier pension to existing pensioners. The answers to a number of parliamentary questions tabled by Harriet Harman, MP, show how the costs would work out.
The estimated cost of raising the state pensions of existing pensioners to the single-tier rate of £144 a week would be around £10bn a year. But a significant part of this total – estimated at between £1.94bn and £2.80bn for the year 2009-10 – is the amount of means-tested pension credit which pensioners are already entitled to but do not claim, the cost of which should clearly fall on the Exchequer, not on the National Insurance Fund. Deducting this from the £10bn total reduces the net cost to between £7.2bn and £8.1bn, of which about £6bn will be covered by the additional NI contributions resulting from the abolition of contracting out.
The probable net cost to the NI Fund of paying the single-tier pension to those already over pension age when it starts in 2017 would, therefore, be between £1bn and £2bn a year, reducing year by year as a new generation of workers reaches pension age. While this is not an insignificant sum, as the price to be paid for providing a minimum pension without a means test it is decidedly modest. And it doesn’t take into account the administrative savings from no longer having to means-test a diminishing group of elderly pensioners.
To argue for this does not imply that £144 a week is a reasonable minimum income for a single pensioner. Pensioners’ organisations will continue to campaign for a substantially higher target – but that campaign would unite the pensioners of today and tomorrow, making it much more difficult for governments to ignore.