Higher pensions, more poverty

Observations on the Tories

In the 1990s, the Tories told us (through the musings of Michael Portillo) that we'd all better start saving for our retirement because the state pension would eventually become "nugatory". Now they promise the reverse: to peg pensions to average earnings rather than prices. This pledge taps into a growing yearning by the middle classes, as well as the poor, in these days of uncertain stock markets and deteriorating company pension schemes: to have at least some pension they can rely on. What the Conservatives have not mentioned, however, is that their proposals could actually lead to a substantial increase in poverty.

At present, single pensioners get £78 a week in state pension, but if their other income is low they can apply for a top-up or "pension credit", guaranteed to raise their total income to at least £102. Under the present government's policies, this means-tested element will become ever more important, as the £78 is being uprated with prices only, but the £102 rises with average earnings (for the current parliament at least). The Tories propose simply to reverse this formula: the automatic pension gets uprated with earnings while the means-tested level is allowed to stagnate in real terms, rising only with inflation. This would gradually reduce the means-tested element, until eventually (probably in the early 2020s) the state pension catches up with the minimum income guarantee, and means-testing is no longer needed.

For a middle-class pensioner, this is quite helpful: the state pension has declined from 26 per cent of average earnings to 16 per cent today; the new proposals would at least peg it at 16 per cent, giving a reliable if modest base of retirement income. For the poor, the story is less rosy. Those who claim the minimum income guarantee - and three-quarters of those entitled are estimated to do so - today get roughly 21 per cent of average earnings; this puts them somewhere close to the recognised poverty line of 60 per cent median household income. But by freezing the guarantee in real terms, the Tory proposals would steadily reduce the relative income of this group, until eventually they would have to survive on 16 per cent of average earnings - a quarter less than today. By failing to share in growing prosperity, they would again sink deep into relative poverty.

The Conservative proposals sound attractive partly because they try to address fundamental difficulties with means-testing - incomplete take-up, stigma, disincentive to save for retirement. A consensus is growing that the non-means-tested element of retirement income must be improved. These proposals will help strengthen that consensus, but do not on their own resolve the dilemma of how to avoid both means-testing and poverty. They would eventually allow people to live on lower relative incomes in retirement than they have had to manage on for half a century - since the earliest days of the welfare state.

Donald Hirsch is Director at Centre for Research in Social Policy, Loughborough University.

This article first appeared in the 13 October 2003 issue of the New Statesman, The awakening of liberal England