Pensions experts Philip Booth (of the IEA and Cass Business School) and Deborah Cooper (of Mercer Human Resource Consulting Ltd ) propose radical reform not just of pensions, but of social security and tax systems.
Booth and Cooper show how the current pensions system is mired in complexity and encourages people not to save and not to continue working after state pension age. The system has grown up, the authors believe, as a result of successive governments trying to buy off voter interest groups with reforms designed to provide assistance to specific groups of older voters. The practical results of these successive reforms are:
· It pays people not to save for their pension.
· A complex social security and tax system that leads to 12 different rates of tax and benefit withdrawal before a couple receives £30,000 per year.
· Rates of tax and benefit withdrawal lead to individuals losing 90p in benefits and tax as a result of having an extra pound of income from private saving, over substantial ranges of income.
· An individual with a retirement income of £10,000 per year is likely to receive that income from nine different sources up to eight of them from the government.
· For many people there are negative real returns from pension saving after allowing for taxes and the loss of means-tested benefits.
· An incoherent tax regime for pension funds that taxes investments in equities but not in bonds and gives pensioners and anomalous tax free lump sum.
· Requirements to buy annuities, even where this is not in the best interests of the pensioner.
· Excessive costs of regulation imposed on occupational pension schemes and members of personal schemes.
The authors argue against piecemeal reform of pensions alone and in favour of a complete overhaul of the pensions, tax, social security and regulatory environment along the following lines:
· There should be a single state pension paid from age 70.
· The state pension would be offered on the contributory principle (there would be no citizens pension).
· An Independent Pensions Commission should be set up to determine issues such as contracting out rebates to prevent their erosion.
· Gimmicks such as free television licences and winter fuel allowances should be abolished.
· There should be one means-tested benefit and it should not be age dependent pensioners should not receive higher means-tested benefits just because of their age.
· Most regulation surrounding private pension schemes can be abolished except that there should be a solvency standard that applies to any contracted-out benefits.
· The tax free lump sum should be abolished but dividend tax credits abolished by Gordon Brown in 1997 would be restored (at roughly equivalent cost).
· Rules requiring individuals to buy annuities with their pension funds should be liberalised.
· The special allowances for older people in the tax system should be removed they should face the same tax system as all other citizens.
Booth and Cooper, both Fellows of the Institute of Actuaries, comment, The proposed reforms are radical and the potential gains from radical reform are enormous. The current pension, social security and tax system is designed by politicians to appeal to narrow voter interest groups: it is time to go back to the drawing board. There will always be some losers from such radical reforms. However, we are careful to put forward sensible transition arrangements.