Tuesday 30 July 2024

Cutting pensions is a deliberate choice

 

Those of us lucky enough to be in receipt of an occupational pension understand that the pension is money that we earned while working, but with the payment deferred. Occupational pensions are paid for partly by contributions made out of salary and partly by even larger contributions made by the employers. I remember the Chief Accountant of one company for which I worked selling the idea of making additional contributions on the basis that, ‘for every pound you pay, you catch the company for another two pounds’. The pension isn’t a generous benefit paid for out of the goodness of the heart of former employers, it’s part of the salary we earned, set aside for the future. And no-one ever, as far as I’m aware, has suggested that it should be means-tested to ensure that it only goes to those who ‘need’ it.

From the point of view of the government, the state pension doesn’t work that way at all. From their perspective, National Insurance is just another tax (hence the way the Tories presented a NI cut as a tax cut) added to overall revenue, and the state pension is just another costly benefit paid for out of current revenue. That perspective is, though, simply a result of the way in which governments choose to deal with the money. From the perspective of state pensioners, they contributed throughout their working lives, and their employers paid even more, in order to ensure a pension when they retired. In essence, the employers’ contribution – just like that made to occupational pension schemes – is part of the salary of the individuals; the difference is about accounting, not the underlying principle. From that perspective, it should no more be subject to any form of means testing than an occupational pension.

Whether the winter fuel payment should be considered as part of the state pension is a moot point. I’ve never been a fan of it, and have always thought that, if the pension is inadequate to cover living costs, the solution is to increase it, not supplement it with random amounts. There’s something rather patronising about assuming that all pensioners are incapable of budgeting for higher costs of fuel in the winter: lots of costs vary over the year, not just fuel and not just in the winter. And to the extent that some people do struggle to pay a peak in costs at one particular time of the year, that struggle isn’t restricted to pensioners, nor to fuel. A one-off annual payment for fuel is, at best, a partial solution to an entirely different problem, a major part of which is that people’s incomes are inadequate in the first place. In addition to that, the payment was made non-taxable, meaning that not only did it go to everyone (like the pension itself) but, unlike the state pension, the increase in earnings it gave to those receiving occupational pensions as well was untaxable. Nothing was recovered in tax from those who didn’t ‘need’ it.

If we see the fuel payment – as I believe we should – as having been part of the state pension, then what the Chancellor did yesterday amounts to a cut in the basic state pension and an increase in the pension credits paid to the poorest pensioners - a transfer from an earned entitlement to a 'benefit'. We shouldn’t be surprised at that. Coming back to occupational pensions, most of us understand that if we pay less in while working, we get less out after retirement. The Tory cut in NI works the same way – contribute less to pensions and get lower pensions. They didn’t spell it out like that, of course; but the reduction in government income nominally intended for pensions was always likely to manifest itself in a reduction in the government expenditure paid for out of that income (especially for any Tory/Labour government wedded to a silly fiscal rule about balancing the books).

That doesn’t let Reeves off the hook, though. Nobody compelled her to cut pensions rather than restore the level of NI contributions; nobody compelled her to cut pensions rather than increase taxes on the wealthiest. Those are choices she – and the Labour Party – are deliberately making. The Tories may have created the problem through unfunded NI cuts, but it is Labour which is choosing to impose part of the consequences on pensioners.

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