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It’s time for elderly millionaires to taste austerity

For higher earners, retirement contributions are fantastic value, mostly thanks to the munificence of the state.

By Will Dunn

Here’s a policy that would be political suicide for any party, and which the next government should do anyway. It involves taking people’s benefits away – so, natural Tory territory – but it’s also redistributive. The only problem is that it targets the most protected group in society: wealthy pensioners.

We’re projected to spend £146bn on the state pension next year, which is about as much as the UK will spend on roads, railways, prisons, courts, the army, the navy, the police, the air force, buses, bridges, judges, spies and airports combined. Our annual state pension bill is enough to run Denmark, all of it, for two years.

Of the 12.6 million people in the UK who receive the state pension, 1.1 million have a private pension pot over £1m, according to the most recent Wealth and Assets Survey from the Office for National Statistics. The least wealthy people in this group will have enough to retire at 65 and be paid £60,000 a year for the rest of their lives. I think it’s highly likely that most people in this group will have no rent or mortgage to pay and most would have other investments. Why should a large group of people, all of whom are guaranteed nearly twice the median income for life, be subsidised in their retirement by current workers?

That is, I should add, what happens when you collect your state pension. The National Insurance Fund is not invested on your behalf by the state. It’s paid out to retirees. One generation pays the previous generation’s benefits, and hopes it will be paid back in turn. By making the state pension a universal benefit, we compel people in poverty (9 per cent of full-time workers are below the relative poverty line) to hand over £221 a week to a million people who barely notice it.

Of course, many would respond that they have worked all their lives and deserve the benefit as much as anyone else. By this logic they should hop in the Audi and stock up at the nearest food bank – they are, after all, as entitled to some free pasta as anyone else. In other areas – unemployment benefits, the NHS, the fire service – we accept that we’re paying for something we hope to avoid using. Our social safety net is there to catch the unlucky, not to be used as a trampoline by the unusually fortunate.

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The wealthy might point out that they’re already paying tax on their state pension, but the tax system also disproportionately rewards the wealthy for saving into private pensions; the effective tax relief on salary-sacrifice contributions from a salary between £100,000 to £125,000 can be as high as 67 per cent. For higher earners, pension contributions are fantastically good value, mostly thanks to the munificence of the state.

There are lots of good arguments about making sure a means-tested state pension is fair and doesn’t discourage saving into private pensions. In Australia, they take the blunt approach of making pension saving compulsory (as they do with voting). In the UK, it would make sense to have a system that recognised how unequal retirement is: the top two deciles hold 84 per cent of all pension wealth, while the bottom half relies almost entirely on the state pension. If we are to keep uprating the state pension (which we should, to avoid a return to pensioner poverty), we need to make it more affordable for the rest of us.

A government with a sufficiently large majority could achieve such a plan. The opposition would howl that it had betrayed pensioners, but they would never undo the policy because the rewards are huge. Trimming our state pension bill by 10 per cent would roughly double the fiscal headroom available to the next chancellor. It could pay for a big pledge like Labour’s £28bn green investment plan twice over. It could cover the cost of upgrading the UK’s entire creaking water and sewage infrastructure in seven years.

Wealthy pensioners must understand that the country cannot afford to further subsidise the luxuries they already enjoy. What do they value more: an extra holiday a year, or their grandchildren’s education?

[See also: Labour manifesto 2024: can Starmer guarantee growth?]

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This article appears in the 19 Jun 2024 issue of the New Statesman, How to Fix a Nation