Should the state pension be means-tested?

In the middle of the second century AD, a young man wrote to his father in Egypt. Apion, son of Epimachos, had just reached the Bay of Naples, where he intended to join the Roman army. He wanted his parents to know he was safe and also that he had renamed himself Antonius Maximus. This, says Richard Abdy in his book Legion: Life in the Roman Army, would have been done “in anticipation of his eventual retirement” and consequent rise in status. 

Assuming he made it through 20 years of battle and travel, he would have been awarded Roman citizenship and a pretty attractive retirement plan too – one with the equivalent financial value of between 10 and 13 years’ pay. Happy times. Also expensive times. Soldiers’ pensions were cripplingly expensive for the Roman state, making up anything from 50%-80% of all state spending (depending on which historian you listen to). This led to all sorts of fiddles. Emperor Augustus put a new tax on inheritance. The amount of time soldiers had to serve before they got their cash was also extended. 

Sound familiar? It might. While working for 35 years in the UK isn’t quite the same as serving 20 in the Roman army, it gets you a similar type of pension. The median wage is around £35,000. Get the full state pension, as 80% of those who hit the state pension age in the UK will, and you have a stream of income worth £200,000, according to the Institute for Fiscal Studies (IFS). That is the amount you would need to buy an index-linked annuity to pay you that level of income. 

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That’s more like six than 10 years’ salary, admittedly, but you will also have had auto-enrolment contributions from the state, which should bring it up to Roman levels. Either way, real money. Add in pension credit (paid to those who are in dire straits, who have not built up the entitlement to a full state pension) and winter fuel payments, and it comes to 5.1% of the UK’s national income – and rising as the population ages and the UK government’s triple-lock becomes politically impossible to abandon. 

That has already led to conversations about pushing back the retirement age even further (it is now supposed to reach 68 between 2044 and 2046) and putting up other taxes; 2,000 years on, the row about the morality of inheritance tax has lost none of its fury. But the UK is now muttering about something Augustus would never have contemplated: a more progressive approach. Imagine that Apion found himself a new occupation after the army: a well-paid job advising a procurement committee, perhaps. Or say Epimachos died and left him a plot of land in Egypt just right for building high-density housing on. Imagine then that the army said they were means-testing retirement and he’d have to give a pile of the cash back. That might have caused riots. 

Future of the state pension 

On to the modern UK. Why, ask fair-minded voters, should those with piles of cash already be awarded what is effectively a state benefit at a time when the UK’s debt position is particularly nasty? The answer today is probably much the same as it was then. First, it is extremely difficult to means-test. If everyone had nothing but a defined-benefit (DB) pension (the type MPs and all civil servants have, providing a set inflation-linked income every year) it would work just fine. But they don’t. And to test anyone without a DB pension (or with a DB and other things too) for income purposes you would need to test it against not just current income from their pension assets, but also against their potential income. Think how fast you would find everyone with a defined-contribution (DC) pension shifting their assets from dividend-paying income stocks into growth stocks if you did not. 

Capital gains instead of income in an era of income-related means testing? Yes, please. But you’d also have to look at anything held outside a pension – and in particular at where income could be generated. So houses, paintings, jewellery – anything that could be sold for the cash to be held in income-generating assets. That might all be a good way to get those pesky pensioners downsizing and freeing up houses. But it would also distort incentives. Why save elsewhere and stick to being auto-enrolled in a private pension if that income might end up reducing your state pension income? Also, if it were to be remotely fair, means-testing would have to be hugely administration-heavy, complicated and intrusive. It would be almost like preparing for a wealth tax. 

The government might not mind this (it appears fine with absurdly complicated taxes elsewhere). The population would. Every time there has been a mention of the stunning expense of the triple lock over the last few years, the opposition’s default response has been to insist that those who have paid the UK’s national insurance (NI) have paid for their pension and must have it. This isn’t quite true (NI is merely a secondary income tax that promises nothing), but everyone thinks it is – which matters just as much. There aren’t many things that could bring the middle classes on to the streets, but not getting what they think they paid for pension-wise is one of them. Look at the WASPI campaign. 

The government knows this. So means-testing probably won’t happen. Something else might: a further shift in the date at which pensions are paid (some of the soldiers who came after Apion had to wait 25 years), perhaps, or a “reform” of the triple-lock that slowly cuts the real value of the pension, a bit like Roman coin-clipping. That said, the fact that these stories of means testing and misery keep popping up does come with an upside: 70% of people do not think that the state pension will exist in its current form at the time of their retirement. Those people might be ready to riot, but they will also be saving as much into their private pensions as they can. Everyone should be doing much the same.

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