The Garrulous Jay – Means-tested State Pension

This week’s back-and-forth in Prime Minister’s Questions made me think it’s time to consider giving up the universal State Pension for a means-tested replacement.

The current system has the kind of unquestioned ‘sacred cow’ status which makes most politicians put it in the “too difficult” bracket. That’s a shame.

But let’s begin with PMQ’s… Shortly after kick-off we had S’Kier accusing the Tories of making a “completely unfunded £46 billion promise” to do away with National Insurance.

This was followed by the suggestion that if the government was to deliver on this promise-that’s-not-a-promise the State Pension would “almost halve”.

Notwithstanding the need for a little theatricality in PMQ’s, there’s so much wrong with this statement it’s almost laughable.

First, as I point out above, the government have not promised to do away with NI. The reality is, though, that this would be eminently sensible. Having two parallel income tax regimes, one of which is linked with a supplementary form of business tax, is ludicrously complicated.

Secondly, by conflating this with a slashing of the State Pension, S’Kier is implicitly reinforcing the misperception that NI contributions in some way fund the State Pension. That’s true only to the extent that any other form of taxation may also be put towards footing this £125 billion bill (source: OBR).

The reality is that this is not the case. The only connection between the State Pension and National Insurance contributions today is that you need to have a certain number of years’ contributions to qualify for some or all of the State Pension.

But the qualifying years link, and the misperception around the way contributions fund the State Pension perpetuated by the Starmer scare tactics, reinforce the sense of entitlement anyone who has worked has when it comes to receiving the State Pension.

This makes contemplating the slaughter of this sacred cow so difficult. So why even consider it?

Firstly, because my discussions with many clients – and especially those under 50 – tell me that the public are already halfway there. People frequently say to me they “don’t want to count on getting a State Pension” when they retire.

Secondly, funding for health and social care in later life is rising all the time at a rate which looks increasingly unsustainable. This problem will only get worse if people live longer but not necessarily healthier lives, and the money will need to be found from somewhere to plug the gap.

Thirdly, means-testing of State Benefits already exists. It therefore seems perverse that it should still be OK for millionaires to take £11,502.40 a year from the State, based solely on having a full NI contributions record.

Finally, although some might argue it would have the opposite effect, I think means-testing the State Pension would encourage greater private provision.

An Opposition that appears to be wedded to the lunacy of the ‘triple lock’ is highly unlikely to contemplate such a move, but sooner or later I think this nettle will need to be grasped.