The International Monetary Fund (IMF) has called on the UK government to consider means-testing the state pension.
Such a move, it is claimed, would make the system fairer and more affordable, with the IMF noting that means-testing would ‘improve sustainability’ and ‘safeguard the most vulnerable’.
The same idea has previously been mooted (in May 2017) by the Organisation for Economic Cooperation and Development, in order to help address the strain that an ageing population is putting on the state pension.
The IMF says: “Giving less pension to the wealthiest retirees could free up resources to finance general benefits. At the same time, similar redistribution objectives could be pursued by using the tax system (e.g. by increasing the tax burden relatively more on better-off pensioners), while preserving a simple and clear structure for state pensions.
“Means-testing for access to social benefits in old age could also be used to improve sustainability while safeguarding the most vulnerable. Alternatively, similar redistribution objectives could be pursued by using the tax system, while preserving a simple and clear structure for state pensions.”
The IMF also pointed out that the state pension age needs to rise, while the triple lock, which is an expensive policy, needs to be reformed.
At present, the UK state pension is based on National Insurance contributions rather than wealth. A move towards a means-tested system, based perhaps on an income threshold, would prove controversial, notes Steven Cameron, pensions director at Aegon.
A more likely course of action, avoiding the political risks attached to means-testing, is for further increases in the state pension age.
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Last summer, the government outlined that the state pension age will rise to 68 between 2037 and 2039. This, though, was seven years earlier than originally planned. As a result, this change will hit everyone born between 6 April 1970 and 5 April 1978; the chances are that future governments will make further similar moves.
Mr Cameron says: “That there may be further increases to the state pension age is no surprise. With people in the UK living longer than ever before, the age from which state pension is paid needs to be kept under careful review to ensure it remains affordable long-term.
“Of all the suggested solutions put forward by the IMF, the most contentious is making state pensions means-tested, which could mean those with earnings or assets above a certain level no longer qualify, even if they have paid National Insurance throughout their working life.”
The government is acutely aware that it has a problem on its hands to sustain the state pension. Earlier this year, the Government’s Actuary Department (GAD) warned National Insurance contributions need to rise to fund it.
The GAD calculated that a 5% tax hike is required to sustain the state pension, which is being stretched by the UK’s ageing population. According to GAD, the fund will be exhausted by 2033 under the current NI rates.
Cameron adds: “Unlike ‘funded’ private and workplace pensions, there is no fund built up to meet future state pension payments, so it’s those who are working who meet the costs of state pensions year on year through National Insurance contributions.
“The amount of state pension also clearly has a bearing on affordability going forward. Under the triple lock introduced in 2010, the state pension has been rising at the highest of earnings inflation, price inflation or 2.5% a year, adding significantly to its cost.”
This article first appeared on our sister site Money Observer
Means testing the State Pension
Post No Deal Brexit, any of us who have a workplace pension can expect no State Pension at all. I’m already hit by this as a 1950s woman- downright unfair