Pensions #5 – Pensions For All

The answer to the benefit problem or an idealistic pipe-dream?  A progressive measure or a scroungers’ charter?

Those are some of the things said about “Universal Basic Income”, aka “Citizen’s Income”.  Currently, several countries are looking seriously at the feasibility of the concept.

Campaigning in Lyon, France (Revenu de Base, CC BY 2.0)

What Does It Mean?

The idea is that every individual should receive a standard income from the government on a regular basis.[1]  There would be no condition attached to this entitlement, other than the most basic of qualification terms (e.g. identification requirements in order to limit to citizens only and to avoid fraudulent multiple claims).

The amount paid under Universal Basic Income (UBI) would be sufficient to cover the basic essentials of modern living, thereby removing poverty completely.  There would be no reduction because of earnings from other sources.  In the pure version of the idea, all other benefits, allowances and credits would cease to exist, apart from those related to special needs (such as disability).  Compromise versions retain some of the existing benefits.

Previously dismissed as a crackpot notion, in recent years it has started to gain traction as being perhaps not such a fanciful, utopian idea after all.

Scottish Green Party, 2014

For one thing, it’s much simpler to understand than the complex current benefits system and correspondingly much cheaper to administer.  No lengthy form to fill in, no intrusive interviewing to establish level of need and complete avoidance of the never-ending cycle of re-justification.  No sanctions regime, because it wouldn’t be required.

Just as important, it removes the wretched “welfare trap”: there would be no complex interaction with, or clawback resulting from, means testing of benefits, which too often results in a disincentive to work.[2]  With UBI you get to keep anything you earn on top.

The obvious criticism is the “moral hazard” one: if you can get by without doing anything at all, many will do just that, opting out of productive work completely.[3]

There’s still a long way to go before UBI could be rolled out with confidence.  My interest here is not in examining the whole idea in depth, but rather with what it might offer regarding state-sponsored pensions.

The UBI equivalent would be a new “Universal Pension” (or “Citizen’s Pension”).  As with UBI, this would be paid on an unconditional basis, this time to everyone within the retirement age groups.

To be even more radical, and taking the logic to its ultimate conclusion, why make a distinction between working age and post-retirement?  If the idea is to provide a guaranteed income to all, then we could do exactly that throughout someone’s lifetime.  UBI would simply continue on, with no need for a separate pension version.  The concept of a retirement age would be abolished (at least in the context of state benefit provision), further simplifying the administration of the benefits system.

How Does It Work?

This brings us to the problems with UBI proposals to date.  The principal issue is simply the amount to be paid, which has to be funded via taxation levied on those who do work.

Clearly, there has to be an incentive to work, to ensure there will always be enough contributors, and overall the scheme has to be affordable.  Currently, the standard working assumption is that any UBI would have to be set at the level of the existing Jobseeker’s Allowance (JSA).  This reflects the view that the UBI should be enough to cover basic essentials, but no more than that.  Even this modest assumption would mean a general rise in tax rates for voluntary earnings.

Moreover, the modelling done so far suggests that there will be losers as well as gainers.  The adverse impact will fall particularly on some of the lowest earners, namely those currently receiving in-work benefits.  The alternative of offering a guarantee that no-one would be worse off than under the existing benefits system would be very expensive indeed.

JSA is currently £73.10 per week for someone aged 25 or over, whereas the State Pension (SP) is £155.65.  Clearly, the magnitude of this difference must be a potential show-stopper for the notion of a “lifetime” UBI: which one of these two amounts should be the target level?

One argument for maintaining the concept of retirement and thereby a distinction between SP and JSA is that, by definition, those who haven’t yet retired should still be seeking work whereas older people are not required to.  Indeed, the JSA is definitely viewed as a short-term benefit and the brutal truth is that it is set at a level which encourages you to look for other income opportunities.

Still, it’s difficult to understand why the difference between the two is so great.  Not only that: the SP enjoys the benefit of the inflation-busting Triple Lock whereas the JSA is frozen, meaning that its value is falling in real terms.

I digress, however.

The Pensions Angle

If we leave aside the general idea of UBI, to concentrate instead on a Universal Pension (UP) paid to everyone of retirement age or over, there’s a lot to be said for it as a design for the state-sponsored pension.

European Citizens’ Initiative for an Unconditional Basic Income (CC BY-NC-ND 4.0)

The current UK State Pension is not quite what it appears to be at first.  There are qualification conditions, principally the requirement to have paid National Insurance Contributions, which not everyone has done because of low levels of earnings.[4]  If you don’t have a full payment record then your pension is reduced accordingly.  Many women, for example, don’t qualify for a full State Pension for these reasons.  Some will have no entitlement at all.

The UK system does include the Pension Credit mechanism, which provides for a safety net of a minimum level of income broadly equivalent to the normal State Pension.  This is means tested, however, and the assessment takes account of existing savings, earnings and other benefits being received (including, for example, the Carer’s Allowance).

The UP would sweep all this away.  There would be no equivalent of a contribution history, used to determine the amount of pension paid to an individual.[5]  In particular, women previously penalised for having incomplete records would no longer be so.  There would be no need for the rigmarole of the Pension Credit means-tested top-up, as everyone would already be receiving the targeted amount.

$64,000 Questions

What would it cost?  Whilst several organisations have produced model costings for UBI, there’s only one I’ve come across that breaks things down sufficiently to allow a separate view of the pension aspects.[6]  The Green Party of England and Wales in its April 2015 paper suggested this for the fiscal year 2015-16:

  • cost of Citizen’s Income, at £155 per week, would be £110.0 billion.
  • total saving from benefits otherwise paid to pensioners would be £87.7 billion[7]
  • giving a net additional cost of £22.3 billion.

How would this be paid for?  One suggestion by the Greens is a reduction in the relief given to private pension contributions in relation to Income Tax and National Insurance Contributions.  As the Greens put it: “… the rationale is that it is in exchange for providing a larger and more certain State Pension for all”.

The total of such relief was valued at £41 billion in 2015.  The calculations by the Greens are in the context of a wider UBI assessment, resulting in a 44% clawback of this relief, yielding £18 billion.  In my stand-alone UP context, that would need to rise to a 54% reduction to match the £22.3 billion we have to find.

That’s all back-of-a-fag-packet stuff, I concede; but, it does at least give a pointer to a possible way forward.  There are other things that might be re-considered as well, such as the future for subsidised travel, winter fuel allowances and so on.

A Universal Pension, simple to deliver and payable to all, is without doubt a workable proposition.

 

 

 

Footnotes

1.  I’ve provided here some links to papers on the general topic of Universal Basic Income:

2.  The marginal impact can be as extreme as leaving less than 10p of added net income for every pound earned.  Universal Credit will improve on this position, but it will still leave the marginal impact for these low earners as worse than for payers of Higher Rate tax.

3.  Perhaps in time increased automation (and use of robots) will transform our economy to such an extent that few humans will need to work.  Till then, we do need a significant proportion of the population to undertake productive work, creating value and thereby generating incomes that can be taxed for the benefit of all of our society.

4. If you earn under £113 per week, you don’t pay any National Insurance Contribution (NIC); but, neither do you build up a contribution history for State Pension (SP) purposes.  If you earn between £113 and £157 per week, you don’t pay NICs but you do get assigned a credit in relation to SP.

There are quirks with the NI regime.  One in particular is that, unlike with Income Tax, it’s not the total income that counts, but instead each employment is considered separately.   If you have two jobs each paying a weekly wage of £110, then you don’t pay NICs at all, despite earning a total well in excess of the lower limit of £157 per week; and you don’t even get any contribution credit to boot.  Someone with two part-time jobs may well not be accruing any State Pension entitlement.

5.  Some proposals suggest a minimum residency requirement in order to qualify for the pension.

6.  I don’t have the resources to analyse financing solutions on my own, but instead I am reliant here on the work done by others, which I acknowledge.

7.  The savings of £87.7 billion come from discontinuance of

  • State Pension (excluding State Second Pension) – £80.7 billion
  • Pension Credit – £6.7 billion
  • payments from Social Fund – £0.3 billion

If Northern Ireland were included the total would increase from £87.7 billion to £90.4 billion. The Northern Ireland position regarding National Insurance and pensions is beyond our scope here, but this possible additional saving is worth noting in any case.

The State Second Pension (SSP) is the latest form of the earnings-related second tier, which is a legacy of previous regimes.  (This provides an Additional Pension, supplementing the basic one.  It replaced the previous SERPS.)  Removing this would add £10.1 billion to the savings, providing 45% of the gap we’re looking to fill, which is a tempting prospect.  It would be very controversial to touch this component, however, which is something the Greens do not propose.

Abolishing it wholesale would indeed be a step too far; but, this category has to be worth looking at it in detail.  Where someone has earned some SSP entitlement but, because of an incomplete contribution history, also qualifies for less than the full State Pension under the current system, our Universal Pension may represent an improvement vis-à-vis the status quo.  The justification of a “no worse off” commitment may allow us to use some of the current SSP budget to contribute to our savings target.

Leave a Reply

Your email address will not be published. Required fields are marked *