While searching for background information on Jonathan Portes, the British economist who heads the National Institute of Economic and Social Research, I came across a superb post of his on the difference between universal and means-tested benefits, and why this matters. It is a long post, full of information. I was tempted to copy and paste all of it (the essay is really that good), but limited myself to a few extracts that, I think, cover the main points of Mr Portes’ message.
The case for withdrawing the Winter Fuel Payment (and free bus passes) from better-off pensioners appears to have united all parts of the political and intellectual spectrum, from The Sun’s argument that we should “stop wasting money on rich pensioners who don’t need it” to The Independent’s complaint that ”hundreds of thousands of very well-off people of advanced years who are being subsidised out of general taxation”. ….
But this apparent consensus should give us cause for thought. ….
Broadly, the system includes two types of benefits:
- Universal benefits, available, if you satisfy the eligibility conditions, regardless of income, such as the Winter Fuel Payment, basic state pension, child benefit (until next year), and (going beyond the [cash] benefit system) the NHS [National Health Service].
- Means-tested benefits, like Housing Benefit, Pension Credit, and Income Support, which you can only receive if you have a low income (and which are withdrawn as your income rises).
Now there are arguments, both economic and moral, for and against both universal and means-tested benefits. Means-testing, obviously, allows the government to target resources on those who need it. However, it also requires complex mechanisms to calculate and enforce the means-test, may stigmatise those who receive means-tested benefits (some of whom may therefore be put off from claiming) and crucially reduces incentives to work and save (since the higher your income, either now or from your future pension, the lower your benefit).
Universal benefits, while being much more costly, and “wasting” money on those who don’t “need” it, avoid these problems; more broadly, it is argued … that they encourage social solidarity ….
[I]n recent years, under both Labour and Conservative governments, there has been a steady shift to means-testing (the expansion of tax credits, the steady erosion in the value of the basic state pension compared to earnings). But the welfare state continues to have a very large universal component. ….
And it is essential to look at the system as a whole. The key point here is that the vast majority of those who get the Winter Fuel Payment also get the basic state pension … (there is of course no obligation on any pensioner, rich or poor, to spend their WFP on “fuel” or heating). …. Essentially, the Winter Fuel Payment is just an add-on to the basic pension – a way of boosting it a little (£4 a week or so) without changing the uprating mechanism.
So what is certain is that looking at the Winter Fuel Payment in isolation from the basic pension has no logic at all – neither economic nor moral. ….
In other words, the money we are “wasting on rich pensioners who don’t need it” is not just the Winter Fuel Payment’s £200 a year, but the state pension’s £5,000 odd. The basic state pension, as well as all the other universal benefits for pensioners, could be abolished, with less well-off pensioners falling back on [income-tested] pension credit. That would save real money – even though without the state pension the majority of pensioners would be on pension credit, the savings would still be tens of billions of pounds per year.
But no-one, so far as I am aware, is proposing this. ….
So what those who are arguing for means-testing Winter Fuel Payment are really saying is that the basic pension of £5,000 or so is OK as a universal benefit, but there’s no case for an extra £200 on top of that. But what’s the logic in that? There is no magic about the current level of the basic pension. Indeed, by historical standards it remains low. ….
The UK needs a proper debate about the welfare state, the respective roles of universal and means-tested benefits, and how they interact with incentives to work and save. The private pension system is broken – the fixation on the alleged excessive generosity of public sector pension schemes distracts from the real issue, which is that private employers have shifted both the costs and risks of pensions to employees, resulting in massive under-provision – a real pensions time-bomb.
Jonathan Portes,”Why pick on rich pensioners’ bus passes?“, Eagle Eye, Econoblog, 10 June 2012.
Mr Portes clearly states an important and little-understood point: means-testing is a form of taxation. Withdrawing a benefit from someone because she has too much income, or too much savings, is equivalent to a tax on income or savings. Opponents of universal benefits argue that they favour a targeting approach so that benefits reach only the poor. But means tests are taxes, and the taxes are also targeted – on the elderly, in the case of old age pensions; on households with children, in the case of child benefits; on the sick, in the case of taxpayer financed medical care. I have often made the same point, for example here.
My only quibble with this otherwise excellent blog is Mr Portes’ description of the UK basic state pension as a universal benefit. Although the basic state pension is not income-tested, it is contribution-tested, so is not fully universal. The benefit is flat-rate, and does not vary with the income of a beneficiary, but a full pension requires a National Insurance (NI) contribution record (for “contribution” read “payroll tax”) of 30 years for men born after 5 April 1945 and women born after 5 April 1950. Men born before 6 April 1945 need a 44 year NI contribution record; women born before 6 April 1950 need a 39 year record. Those with a shorter contributory earnings record see their pension reduced proportionately, and those with less than one full year of NI contributions receive no pension at all. Previously those with an earnings record of less than 25% of the years required for a full pension received no pension, so the UK basic state pension has become more universal, even as its value has fallen relative to wages. Also, a married person can top up a basic pension to an amount equal to 60% of the pension of his or her spouse, without cost and without the other spouse suffering any reduction in pension benefit. Further, the state provides NI credits to people in certain circumstances, for example when they are unemployed, caring for young children, or caring for a severely disabled person. These NI credits boost a person’s record for pension purposes.
The United Kingdom has what is possibly the most complex pension system in the world, and the basic state pension is just one small part of it. Simplicity is an often-overlooked advantage of universal systems.