The state pension , next to our capacity to work, is most of our greatest financial asset. Conservatively valued at £250,000, the new state pension of £155.65 p.w. is worth more than most new Lamborghinis. So why do we dismiss it as a pension Trabant?
Talking with the Pension Minister last week in Birmingham, I sensed he was embarrassed to hear that it’s purchasing power is almost ten times the median DC pension pot. For those just getting by, it is getting close to a safety net, indeed – when supported by other benefits – and the age-related personal allowance, the elderly can now enjoy tax free benefits from the State of which we should be proud.
This seems to me to be something to celebrate. That those benefits are no longer ours by right at 60 or 65 is a consequence of their revaluation. The Government’s continued commitment to the triple lock (at least until 2020) is in the teeth of austerity. We are doing something in Britain to reduce elderly poverty and I’m very glad we are.
The bill to the exchequer for pensions will be around £157bn in 2017 of which around £110bn will be directly from the state pension. This bill is estimated to rise regularly over the remainder of this parliament (as a result of the triple lock).
Is this fair?
For much of my working life I have been selling private pension saving because of the inadequacy of the state pension to replace lifestyle or even provide a safety net. The upgraded state pension (paid tax free to those relying on it) can no longer be dismissed as nugatory (Michael Portillo’s description).
But I am hearing people saying that this is unfair. Today John Cridland will be publishing his report into intergenerational fairness and I hope he does not reinforce the prevalent prejudice that our elderly are being treated too well.
There is, in most cultures, a wish to treat the most elderly with the most respect. Society works like that. This recent idea that baby boomers are all take take take is being used against those in retirement who were the children of the war years. The frugality of my parent’s generation was fashioned from rationing and their capacity to look death in the eye was shaped by the horror of living in Britain (or of evacuation) when your young life was under threat from a wayward bomb or a torpedo.
The obligation that a younger generation owes to those surviving from the generations above them is often referred to as “inter-generational solidarity”. It is earned by the older generation by preparing, nurturing and educating the young.
That I pay a marginally higher national insurance contribution or income tax payment to ensure that my parent’s generation enjoy higher standards of living in poverty seems entirely right.
Inter-generational and intra-generational solidarity
My friend Daniela Silcock is on the radio this morning (Radio 4 7.50 and 8.50 if you missed her on Wake up to Money explaining what the State Pension would look like if we were to pay it absolutely “fairly” between our generation. We would have to pay more to those with poor medical records than good ones, we’d pay people in Chelsea less than those in Walthamstow (there’s a 15 year difference in life expectancy), we’d pay more to men than women and we’d pay less to the well educated than those with no qualifications.
I suspect that Daniela has her tongue in cheek, it is ludicrous to suppose that a pension can be paid fairly. Even the most healthy, well educated female can die unexpectedly. If life is unfair, death is unfairer!
Which is why we regard the state pension as an insurance against living too long and not a right to a proportion of a national savings pension pot. This is what we mean by intra-generational solidarity- we accept some unfairness in the concept of national insurance.
Just as it is wrong for us to discriminate payments to our current pensioners, so it’s wrong for us to suppose that each generation coming along behind us should be treated progressively better. The increase of the state pension age is merely a reflection of the increases in the age at which we die (and stop getting our pensions).
The management of the increases in state pension age may not have been perfect (we all accept the WASPI anomaly) but the principal of linking state pension age to average mortality is a proper one reinforcing generational fairness and creating intergenerational solidarity.
Stop this unseemly bickering!
We have a job in hand which is to improve lifetime savings so that the state pension we receive is supplemented by proper lifetime pensions. For a diminishing number of us, the employer promise of a defined benefit remains but it is generally accepted that this cannot be a universal promise. The genuine unfairness of two people doing the same job – one on a proper DB pension and one with pence in the pot remains and is one that needs addressing. But I see little point in wasting energy levelling things down when there is an opportunity to make more of the workplace pensions we are setting up under auto-enrolment.
Whatever John Cridland’s report into the state pension age ends up saying, I hope that it will acknowledge that the state pension is valuable and becoming more so. The big picture is looking brighter despite the plight of the WASPI women and the remaining levels of pension poverty that still exist.
I hope that Cridland will make it clear that the financial fate of pensioners to come is a lot rosier than it was , without lulling any of us into a sense of security that it is what it should be. Our state pension needs supplementing by private pensions and those pensions should be properly funded throughout our working lifetime.
Our working lifetimes have to be longer as our non-working retirements are longer. There is nothing unfair about that.