Britain should not give a state pension to the rich and should instead spend the money to boost benefits for the poor, according to the Organisation for Economic Co-operation and Development.
The UK state pension is based on national insurance contributions rather than wealth, which means it can be received by anyone who has made those contributions, including billionaires. At the same time, British society is ageing and claims on the state pension are growing, while the number of workers is shrinking.
Speaking with the Financial Times, Mark Pearson, deputy director of employment, labour and social affairs at the OECD, said: “Faced with these pressures, are you going to ask people of working age to pay more, or people to work longer before they can claim their pension?”
He continued: “Another way to ensure an adequate pension is to think about whether the pension should only be paid to those who really need it, to ease the tyranny of the maths. Giving less [pension] to the people at the top would free up resources to increase general benefits.”
Mr Pearson said Britain’s pension system was among the least generous of the OECD’s 35 member countries.
The think-tank further said that ending payments to the wealthiest 5-10% would allow the government to give more to the more vulnerable members of society.
“Means-testing state pension would undermine private saving”
Dr Ros Altmann, the former pensions minister, disagrees with Mr Pearson. She says: “Means-testing the state pension would undermine private saving. If you only give pensions to those who have built up private pension income then you disincentivise people from bothering to save.”
She adds: “In fact the UK has tried this and it was a damaging failure. Pension Credit was introduced in 2002 in order to ‘target’ state spending on the poorest pensioners. Ten years later, nearly half of pensioners were entitled to the means-tested higher pension credit and private pension coverage had plunged. Incentives to save were damaged and pension costs rose.”
“The best way is to pay a basic state pension for all and then encourage people to save privately to increase their income beyond that.”
Read Moneywise columnist Jeff Prestridge on why you shouldn’t rely on the state pension for retirement.
This is an edited version of a story that first appeared on our sister website, Money Observer.