This article was originally published in the Daily Telegraph and is reproduced here with permission. Read the original article.
David Cameron has announced that if the Conservative Party wins the election, universal pensioner benefits will again be protected. Winter fuel payments, free TV licences and bus passes will continue to be provided to pensioners, regardless of their income, as part of what the Prime Minister calls our “fundamental duty” to care for them. This announcement comes on top of a previous commitment to maintain the “triple lock” on the basic state pension, ensuring that it always goes up by the highest of earnings growth, inflation and 2.5 per cent.
Defending his decision, Mr Cameron painted a vivid picture of pensioners in need. “There are those who say it’s an unnecessary luxury during a time of national financial difficulties. They’re wrong,” he said. “Say that to the older woman who can keep warm tonight, on this cold February evening, because she’s been given the money to heat her home.”
These promises will clearly be welcomed by many pensioners. As a group, retired individuals may find it more difficult than others to adjust to changes in the level of support provided by the state. It may be that society wants to continue to protect older individuals from cuts to benefits. And of course there are still poor pensioners: the elderly woman struggling to heat her home who the Prime Minister referred to still exists.
But there has been a huge shift, and our perceptions need to keep pace with reality. Back in 1961, nearly half of pensioners were in poverty according to the official measure and were eight times as likely to be in poverty as working-age adults without children. However, the data show very clearly that pensioners are now no more likely to be in poverty than the rest of the population. And after accounting for housing costs, the median (middle) income of pensioners is actually higher than that of non-pensioners. In 1992, median income among pensioners was 20 per cent behind the rest of the population. In 2007–08, they were 5 per cent behind. Now they are 5 per cent ahead. The typical pensioner is now better off than the typical non-pensioner.
What explains the catch-up of pensioners? Over the long run, the two big factors have been growing private pension entitlements and increases in state support. For the past 30 years, successive generations reaching retirement have tended to have bigger private pension pots than the last, helping to push up incomes in later life.
To a large extent, this is due to the rise of occupational pensions – which have been made substantially less generous for current workers.
On top of that, successive generations have typically been entitled to more state pensions, and particularly higher earnings-related state pensions – which again will be less generous for current workers. And for the poorest pensioners, the Labour government oversaw a large expansion in the support offered by the state through pension credit.
In recent years, the catch‑up in pensioner incomes has accelerated. While lower interest and annuity rates have reduced the incomes of some pensioners, they have fared much better than those of working age on average. The falls in overall living standards since the recession have overwhelmingly been driven by the sharp decline in real earnings among workers. Clearly, this affects working-age people much more than pensioners, most – but not all – of whom have stopped doing paid work.
Changes in the level of state support are also important for explaining the contrasting fortunes of pensioners and the rest of the population. Annual real-terms spending on pensioner benefits has increased by an average of £300 per pensioner over the course of the current parliament, a total of £8 billion. This has been offset by an £8 billion fall in spending on benefits and tax credits for working-age people. While the state pension has been protected by that “triple lock” guarantee, most working-age benefits have increased by less than inflation since April 2013.
In the context of these big changes, the future of universal pensioner benefits begins to look like a small issue, and the difference between the main UK parties looks even smaller. Winter fuel payments and TV licences together cost the government less than £3 billion a year, or about 2 per cent of the £120 billion spent on state pensions and other pensioner benefits. While Mr Cameron has pledged to protect these benefits for all pensioners, the Labour Party has proposed to remove the winter fuel payment from those paying higher- or additional-rate income tax. This would save only £100 million a year – less than 0.1 per cent of total spending on pensioners.
Much more important is the commitment made by all three main parties to maintain the triple lock on the basic state pension. This is expected to cost £2 billion a year by the end of the next parliament, relative to increasing the basic state pension in line with prices.
More importantly, the triple lock will become increasingly expensive over time. Because in every single year the state pension rises in line with the highest of earnings and prices (and 2.5 per cent), it will rise faster than both in the long run. The independent Office for Budget Responsibility estimates that by 2060, the triple lock will cost £15 billion a year in today’s terms (nearly 1 per cent of national income) – more than if the state pension was increased in line with earnings. If politicians really think this large and rising cost is sustainable, they should say so explicitly.
Looking beyond any particular policy or party, the ageing population represents an enormous challenge for future governments, and there are no easy answers. It is likely to get harder to balance supporting the living standards of pensioners with other demands on the public purse.
The Government has started to confront some of these challenges. It has continued to implement increases in the female state pension age set out by previous governments, and brought forward the planned further increases for both men and women. The introduction of the single-tier pension will also reduce government spending in the long run, as it is less generous than the current system for most individuals.
But as further tough choices are made and discussed, it is important that public debate and political rhetoric reflect reality. Pensioners are no longer more likely to be poor than the rest of the population. And after housing costs, median income for pensioners is higher than that for non-pensioners.
As ever, the desired generosity of the system towards different groups is a matter of political preference. But it is no longer possible to justify greater generosity towards pensioners on the basis that they are worse off than the rest of the population – they aren’t. That is itself a triumph of decades of social policy. We should celebrate that triumph, rather than talk as if it hasn’t happened.