Why the state pension should be means tested

Pensioner counting pennies © Getty Images
We should only pay state pensions to those who need it

The Cridland report produced last week ended up rather lost in the news about the attack at Westminster and the looming delivery of Theresa May’s letter to the EU. But it is worth going back to it for a quick look.

It recommends the state retirement age being pushed from 67 to 68 by 2039 (current plans are 67 by 2028). It also suggests that the triple lock should go after this parliament, and that those who want to work past state retirement age should still be able to defer taking their state pension. All this seems reasonable given rising longevity and the huge cost of our state pension system.

One of the things it also considered – and, to some complaint, has now rejected – was the idea that there should be some flexibility in the state pension age; that those who are sick or disabled should be able to start getting it early.

This, the argument goes, would mean that the state pension would be able to make some allowance for the varying life expectancies across the country. After all, if life expectancy is six years higher for those in the lowest socio-economic group than it is for those in the highest (this gap is at least narrowing, by the way) surely for everyone to get a fair crack at pension payments those in the lowest should be able to start getting payments earlier.

It’s also true that the later you make the state pension age, the more likely it is that those in poor health will find there is a gap between when they stop working and when they get a pension income.

Former pensions minister Ros Altmann is all for it: “Because National Insurance is such a significant part of salary”, she says, “it seems inequitable to lock out those people who we know have shorter life expectancy by continually raising the state pension access age.” John Cridland doesn’t seem to disagree with the premise here. But he reckons that attempting to differentiate is just too complicated and should therefore be ruled out. He suggests additional means-tested help for those near retirement age instead.

This makes sense. The key thing to note is that National Insurance is not a kind of personal insurance. If it were, those with lower life expectancies would pay a lower premium thanks to the expectation that they would take less income and this issue of paying in the same as other people and getting less out wouldn’t exist.

What NI actually is, is income tax. There is no National Insurance fund, no personal record of premiums paid and benefits received – nothing of the sort. Its just part of the huge pile of unhypothecated taxes that we all pay all every day to keep the government show on the road. From that pile comes the state pension, but also all the means tested benefits that we pay to those who need more than the state pension or who aren’t working and aren’t yet getting it. In these straitened times what’s more important?

Look at it like that and there is surely more reason to means test the entire state pension (why pay it to those who don’t need it?) than there is to offer non-means tested early payments to the unwell.

  • James Taylor

    In para 4, surely you mean 6 years lower, not higher?

    Means testing the state pension would merely penalise people who do the right things to fund the feckless.

    • AAJ

      On average, it is more likely to penalise people who were lucky and fund people who are unlucky.

  • OldCodger

    I tend to agree with James Taylor, we already subsidise the feckless to an inordinate extent, as well as the incompetently reckless (eg bankers).

    • Peter Edwards

      The feckless are a tiny tiny minority overhyped by the right wing media.

      Women are vastly disenfranchised when it comes to earning a living and do the bulk of unpaid work like Child Care and looking after Relatives so means testing makes sense.

      However I am against means testing and think everyone should have a stake in their society.

      Can’t wait to see the results of Universal Basic Income i think the Greens are on to something.

  • marylyn ford

    Would you really expect people to pay into something from which they know they will never benefit.

    • Peter Edwards

      That’s what governments are for.

  • Dick Ansell

    There is in fact a record of NI payments. If you opted out and paid in to a second state pension or SERPS (or had a company or third party pension) you will find that when you retire your SERPS or Second State pension payment are subject to COD (Contracted Out Deduction) so while you thought it was a good idea at the time, the government nick it back again when your retire. A total shock to most, as I have never ever heard of a pensions advisor mentioning it. For me the COD is greater than the SERPS payment.

    The NI records also allow you to get a State pension forecast, and will let you know if you need to make up payments or for how many years more you must pay in.

    So whoever wrote the the header needs better research.

    • Merryn

      There is a record. But there is no fund… All state pensions are funded out of current taxation.

  • Neil Cleere

    I agree completely with this article and I’ve held this view for some time. NI is a tax, pure and simple and contributions should be regarded as a premium on your insurance policy that is there if you have no other means of income in later life. I get that it will to an extent penalise the able and willing and encourage the lazy and unwilling. However, if the able and willing need it, it’s there for them too when the time comes. I’m coming up to retirement age later this year, I have no intention of retiring as I own a successful business so why should I get a pension from the state when I don’t need it and the country is struggling to find money for our welfare state. I would much prefer if nobody got old age pension if they have alternative income and the savings used to support those in need and better fund the NHS. Something has to give and you can’t take it from people that has no money. This makes perfect sense but any party political proposing it will lose a lot of the grey vote – and that’s the problem

  • Cynic_Rick

    I was given to understand the cost of funding the administration of a viable means test would outweigh any savings in pensions paid out.

    • Merryn

      This is an interesting part of the argument. Means testing is a nightmare of admin and expense – which is why lots of academics are interested in the basic income as a replacement for all means tested welfare for example. But given the systems we already have in place for this i don’t think the expense would outweigh the gain – certainly not for the current generation of pensioners.

      • marylyn ford

        Not if you cost each benefit in kind, and make all benefits taxable.

  • Robin Leggate

    Two points: 1) If you think that people with lower life expectancy should be able to access the pension early, then we should let men retire younger than women.
    2) Every time you means test anything, you take away a bit of incentive to look after yourself rather than let the state run your life for you.

  • haggardt

    People in higher socio-economic groups will make more contributions. Leave it as it is.

  • Gill Courage

    Means testing costs money and leave loopholes as well as room for unfair decisions (which cost more money to fight).
    Lets just roll NI into the general taxation and be honest about it. That’s one, easy simplification and cost saving. The rules and calculations are ridiculous anyway.
    Now let’s add up all the people currently on state benefits; the pensioners, the unemployed, children and students, the disabled or sick and working families on “lower” incomes. How much do we dole out to them and how much does that cost in admin? How much extra would it actually cost to pay a universal income?
    Can we give every person a tax allowance that is transferable to whoever supports them financially? And make the tax starting point at, or above, the living wage?
    We really need some honest numbers and an end to the political fiddling about with things that normal people use to plan their lives………..

  • A Frith

    NI may not be hypothecated, but the whole nation understands clearly that it is supposed to pay for the welfare state. It is the tax that confers entitlement to a whole slew of universal benefits. Payments are recorded and records kept for a lifetime.
    People’s lifetime decisions are based on an assumption of a small but reliable state pension. It’s a good system. It isnt broken. It doesn’t need fixing.

  • Dave Caldwell

    Possibly the worst article I have ever read. The clue is in the name. It is an Insurance scheme. In fact I opted to pay missed years for my wife, and that was not so someone could rob me later. Also, the legality of deciding to steal my money by changing access from 65 to 67 should be challenged legally.