The Liberal Democrats’ August 2004 pensions policy paper, Dignity and Security in Retirement, covers the whole range of pension provision, State, occupational and private. The main proposal, however – and the one of most relevance to the present generation of pensioners – is for a Citizen’s Pension which would eventually replace the whole of the present State pension.
The Citizen’s Pension would be set at the level of the Guarantee Credit (currently £105.45 for a single pensioners and £160.95 for a married couple) and uprated in line with average earnings. It would virtually remove the need for the means-tested Pension Credit, assuming that the Savings Credit element, which now “rewards” income above the level of the basic pension, would in future only reward income above the Citizen’s Pension. The paper also argues that a Citizen’s Pension at that level would “negate the need for additional state pensions”. The State Second Pension would, therefore, be phased out, and all future pension provision above the level of the Citizen’s Pension would take the form of occupational and private pensions.
The simplicity of this vision is limited by the fact that, initially, only those aged 75 and over would qualify for the Citizen’s Pension. Although this is described as “the first step to providing it for all above state pension age”, the paper gives no indication of the time scale envisaged. One suggested option for funding the extension, however, is to raise state pension age. As the paper promises at least 15 years’ warning of any increase in pension ages beyond the raising of Women’s pension age from 60 to 65 between 2010 and 2020, it seems unlikely that the transition to a Citizen’s Pension for pensioners of all ages would take place before 2020.
It is important, therefore, to consider what would happen to the state pension for the under-75s over the next 15 years or more. The paper gives an assurance that they will not lose out: “They will keep their current pension entitlement, along with any means-tested benefits they are currently claiming. Many of them, it is claimed, will also benefit from the replacement of Council Tax with a local income tax. But there is no suggestion that the Basic Pension would, like the Citizen’s Pension, be linked to average earnings. Presumably the intention is that it would continue to be uprated in line with prices, producing a steadily widening gap between the under- and over-75s. Initially, the gap between the under-75 Basic Pension and the over-75 Citizen’s Pension, for a single pensioner, would be £25.85 a week. By 2020, it would probably be over £50 a week at today’s prices – and even more in cases where the Basic Pension is not payable at the full rate.
That differential would be very difficult to defend. At the same time, however, the cost of bringing the under-75s pension up to the Citizen’s Pension level would also rise year by year as the gap widened. It is, to say the least, by no means certain that a future government of whatever party would regard such a major increase in the incomes of younger pensioners as a high priority.
Second-class Citizen’s Pension for married couples
Equally problematic is the treatment of married couples. At present, both partners can build up entitlement to a full Basic Pension at the single person’s rate, giving the couple twice as much pension as a single person. If the wife’s entitlement based on her own contributions is less than 60 per cent of the full pension, she can get a pension on her husband’s insurance, bringing her up to the 60 per cent level. This is an additional benefit for married women, not available to single women or members of unmarried couples. Under the Liberal Democrats’ proposals, the Citizen’s Pension would not be based on contribution records. Yet a married couple would get a Citizen’s Pension of only £160.95 a week, £49.95 less than two single pensioners, even if both husband and wife had worked continuously since leaving school.
We are not told how much of the £160.95 would go to the husband and how much to the wife, but there would rightly be a storm of protest from married women if, after paying the same taxes and contributions as their husbands, they received less than half the total Citizen’s Pension. Moreover, as a couple with full entitlement to a Basic Pension now get a total of £159.20 a week, to pay the husband more than half the Citizen’s Pension would mean that the wife would lose part of her present pension entitlement. To avoid this unacceptable outcome, the married couple’s Citizen’s Pension would have to be divided equally between husband and wife.
A cohabitation rule?
The paper does not specify how unmarried couples would be treated. To give equal treatment to married and unmarried couples would require a “cohabitation rule”, involving detailed enquiries into the couple’s living and sleeping arrangements to decide whether they were “living as husband and wife”. The alternative would be to treat an unmarried couple in the same way as two single pensioners, paying each of them a Citizen’s Pension at the single person’s rate. This would mean that, while the present contribution-based system offers an additional benefit to wives (but not unmarried partners) whose contribution record does not entitle them to a full pension, the Citizen’s Pension would treat married couples less generously than unmarried couples. Again, it is difficult to see how this could be defended.
The paper stresses the advantages of a Citizen’s Pension for women, listing ways in which their Basic Pension entitlement is impaired under the present system. For women under 75, however, who would not initially qualify for the Citizen’s Pension, it makes only two rather weak proposals: that all women who have ever paid the reduced married woman’s stamp should be warned of the possible effect on their pension rights, so that “many in their 40s and 50s will then have time to take steps to enhance their pensions in other ways”, and that women should be allowed to boost their state pension entitlements by paying “back contributions for incomplete years”. If, as suggested above, extension of the Citizen’s Pension to this age group is likely to be delayed for at least 15 years and possibly much longer, more radical measures are needed to assist those with deficient contribution records. If, on the other hand, the extension to the under-75s is expected to take place within a few years, it hardly makes sense to encourage women to pay back contributions from which they will derive no additional benefit.
An Independent Pensions Authority
The paper proposes “a permanent Independent Pensions Authority, which would take many of the decisions about pensions policy out of the party political arena. This would involve all the major political parties, representatives of employers through the CBI and of employees through the TUC, independent pensions experts such as the Pensions Policy Institute, and representatives of pensioners such as Age Concern and Help the Aged.” The proposed “Authority” would be “advisory and not able to make policy” but would publicise its advice to the Government.
The creation of a body of this kind has been advocated elsewhere, notably in the Catalyst working paper Better Pensions: The state’s responsibility, which proposed a National Insurance Commission consisting largely of representatives of contributors and pensioners, to restore confidence in social insurance and to protect the National Insurance Fund from manipulation. There is a strong case for such a body, though it is misleading to describe an advisory committee as an “authority” and the organisation representing pensioners nationally is, of course, the NPC, not Age Concern or Help the Aged.
The State Second Pension
“The Citizen’s Pension”, the paper claims, “would ensure that a state pension is paid at a level that negates the need for additional state pensions.” The implication is that private funded pension schemes are a satisfactory means of providing any retirement income above £105.45 a week (or the equivalent in terms of future earnings levels). The State Second Pension would therefore be phased out once the Citizen’s Pension was fully extended. The only justification offered for this proposal is that it would get rid of “the minefield of complexity that surrounds contracting in and out”. Nothing is said about the advantages of the S2P as a vehicle for providing an earnings-related addition to the Basic Pension or about the increasingly apparent defects of the private pensions market.
The central proposal in the Liberal Democrats’ policy paper is that the Basic Pension should be replaced by a Citizen’s Pension, with entitlement based on a residence test rather than on contributions, payable initially only to those aged 75 or over. Even if the case for a Citizen’s Pension is accepted in principle (a question which requires further consideration), the proposals are open to a number of serious objections:
- It could take many years before the Citizen’s Pension was extended to the under-75s and, during that time, the gap between the Citizen’s Pension, linked to average earnings, and the Basic Pension, linked (so it appears) to prices, would widen substantially and the cost of closing the gap would increase.
- Married couples would get a smaller Citizen’s Pension than two single people, even if both husband and wife had worked continuously, in contrast to the present system which allows both partners to receive a full Basic Pension at the single person’s rate.
- An intrusive cohabitation rule would be needed, unless the intention is that unmarried couples should be treated more favourably than married couples.
- The paper does not adequately address the problem of Women’s pensions in the possibly lengthy period before the Citizen’s Pension is extended to the under-75s.