In very cautious terms, Deputy Prime Minister Nick Clegg has questioned the current set of universal benefits for the elderly. This is a major deviation from what has thus far been the coalition’s stance on old-age transfers. When two IEA authors proposed an end to universal age-related benefits earlier this year, Pensions Minister Steve Webb denounced the proposal as ‘loathsome’.
So it is encouraging that Nick Clegg and other senior Liberal Democrats are at least willing to discuss the issue. But their criticism of universal benefits has been far too shallow. Their position seems to be that limiting the universality of these payments is only a necessary evil, like food rationing in wartime. If only the public finances were in better shape, handing out non-targeted gimmicks would be a great idea.
But this misses the point. Even if the government of Norway decided to donate their oil fund to the UK, a strong case would remain for reforming old-age provision. The current system is a potpourri of special benefits for special purposes. Why not replace it with one single, unified cash transfer? Old-age pensions are either sufficient to pay for necessities like transport, fuel, TV licenses and eye tests, or they are not. If the former, there is no need for free bus passes, Winter Fuel Allowance, free TV licenses or free eye tests. If the latter, the pensions of the least well-off should be raised. There is no case for piling layer upon layer of special benefits on top of each other. It leads to a wholly unnecessary expansion of the welfare bureaucracy, and it is also patronising towards the recipients, who are denied the choice of spending the cash equivalent of their entitlements as they see fit.
Furthermore, apart from Winter Fuel Allowance (which has nothing to do with winter fuel, it is a cash transfer like any other), special benefits represent ‘object subsidies’, which are just about the least efficient way of enabling access to a good or service. They crowd out non-subsidised alternatives, such as shared taxis in the case of bus passes, locking recipients into the form of provision that politicians have chosen for them. They ease pricing pressures on providers, e.g. opticians in the case of free eye tests, who might otherwise have to try harder to come up with low-cost offers. And they introduce inequitable, opaque forms of redistribution. A free bus pass, for example, is worth a lot more in big cities than in remote villages. Subject subsidies – subsidising poor pensioners, not opticians or the municipal transport service – permit diversity of provision, preserve incentives to shop around, and are much more transparent.
If the current hotchpotch of non-contributory age-related benefits was converted into a single transfer, the issue which Nick Clegg refers to – the fact that millionaires also qualify for benefits – would be resolved in passing. A single transfer only requires a single taper, which would automatically end transfer payments to the wealthy.
Even so, this would only be a makeshift solution. The real issue is to remove the administrative complexities and fiscal penalties which prevent many people from saving enough for their old age, making them dependent on government handouts in the first place. In the long run, the aim should be a situation where the vast majority of the elderly can comfortably draw on their own savings and assets, built up over their working lives. Government transfers would then be a minor issue for most pensioners, who would no longer be dependent on the benevolence of voters and politicians.