The Claim – Pensions are at risk with independence
The Truth – Pensioners are worse off in the UK, and an independent Scotland can do better by respecting our pensioners in a way the UK does not.
During the 2014 campaign for Scottish independence, age was seen as an important determiner of vote choice: among 60-69-year-olds, 59.5% voted no. This increased to 67.1% among the over 70s. For some, this was unsurprising given the tendency of older voters to stick to the status quo.
Among those older voters who voted No to independence, many cited fears over the safety of their incomes – both from state pension and other investments.
Therefore, a key goal of the new independence campaign should be providing a positive vision for Scotland’s older people on how independence could benefit them. To win over older people the independence movement needs to make clear how pensions will be protected/improved upon and pensioners respected and valued.
However, it is also necessary to point out that the state pension system as it stands is fundamentally unfair for older people and pensions are far from safe by staying in the UK. In this, the first in a series of articles on pensions, we will examine exactly how the UK state pension system is failing older people and is unsustainable for future generations.
The UK has the worst state pension in the developed world- in 2016 it was only worth 29% of average income. It is striking how much less that is than other countries: the EU average is 70.5% meaning that UK pensions receive more than two times less than comparable countries. The only country to receive less is South Africa, where state pension equals 17.1% of average incomes. Considering that South Africa has the highest rates of inequality in the world and more than half the population is living in poverty, it is hardly a nation to benchmark against.
However, the UK also has the largest pensions sector in the EU and pensioners receive half their income from private pension investments. This is certainly due to the UK’s more wealthy people being able to save for their retirement and this is not an option open to everyone. So we still have significant pensioner poverty in the UK. In 2017, 17% of Scottish pensioners were in relative poverty compared with the EU average of 14%.
Life expectancy across the UK
In addition to being inadequate to live a life free from worrying about financial security, the way the state pension system is structured means that the rich are being subsidised by the poor. This occurs in two ways:
- Firstly, there is a uniform state pension age (SPA), which means that those who live longer receive a greater share.
- Secondly, those people who are already deprived face more financial instability before getting to SPA, dampening their ability to supplement the dismal state pension with other sources.
In Scotland, life expectancy is two years less than the UK average for men and one year less for women. A report by the Communities Analytical Services estimated the lifetime value of the state pension is around £10,000 lower for men and £11,000 lower for women in Scotland. This means people pay the same percentage of their wages into the national insurance fund but receive around £10,000 less from it.
Raising the state pension age is fundamentally unfair on Scots
These inequalities will be exacerbated by increases to the SPA. Under the current law, the SPA is due to increase to 68 between 2037 and 2039, having been brought forward by the 2014 Pension Act. This will mean that by 2040 the UK will have the oldest pensionable age in the OECD (compared to the average of 64.4 years old).
The University of Stirling has noted that the uniform raising of the SPA will mean that: “as part of the UK, Scotland would implicitly be part of a pension contract that would be actuarially unfair.”
Women have been particularly unfairly affected. According to the OECD women are the most likely to be in poverty in old age. Government legislation to speed up the equalisation the SPA has made this worse. The equalisation of the SPA to 65 was originally to occur over a ten-year transition period but this was cut by the Conservative-Liberal Democrat coalition. This meant that around 300,000 women, known as WASPI women, born between December 1953 and October 1954 had to wait up to 18 extra months to receive their state pension. A further 2.6 million women were negatively affected by this acceleration.
Pension credit changes
From this it is already clear that the current state pension system fails the people of Scotland. Adding to this is that the transition to universal credit adversely affects poorer pensioners.
Under the previous means-tested system, a couple was eligible for credit if at least one of the couple was at SPA. However now they will only be eligible if they both are which means that if a 65-year old woman with a partner aged under 66 would not qualify for Pension Credit (PC).
As a result mixed-age couples will only be able to claim universal credit, making them up to £500 a month worse off. Currently, mixed age couples can claim PC even when the younger partner is not of SPA which gives them £249 a week. The reforms mean that the younger partner will have to look for work and they will only receive £500 a month.
Women will be especially unfairly penalised by these changes. According to Debbie de Spon of Women Against State Pension Inequality: “the effect will be to plunge the poorest further into pensioner poverty, and will particularly affect women who traditionally have partners older than them.” These reforms are almost certainly a stealth tax on the poor and those with older partners.
This is not the first time a Westminster government has enacted policies that damage pensioners. In 1997 the then Chancellor Gordon Brown abolished tax credits on share dividends resulting in a shortfall in pension funds that is still being felt today. A report written by Terry Arthur, a fellow of the Institute of Actuaries, estimates this has cost the UK at least £100bn.
Despite the low value of the state pension and rises to the SPA, pensions contributions are not enough to sustain pension payments in the long run.
The UK pensions system is a pay-as-you-go system whereby national insurance contributions (NICs) paid by those in work one month pay the state pension the next month. The system relies on the working population being larger and contributing more than the amount of state pension that is taken out.
However, demographic shifts mean that the number of older people is expected to double by 2050 and triple by 2100 whilst birth rates remain steady or in decline. This is especially acute in the UK, where these demographic challenges are compounded by policies that deter immigration. Any reduction in migration, which is a very probable scenario after Brexit, could therefore have a serious effect on our ability to afford pensions.
Receipts from national insurance are often approximately equal to the amount spent on state pension, not including other benefits that are also funded from NICs. This puts the national insurance fund under considerable pressure. In 2015/16 it received £86bn in NICs and paid out £95bn in benefits, including £89bn in state pension. It therefore required a £9.6bn Treasury grant, up from £4.6bn in the previous year 2014/15.
In years where there is a surplus this is used to reduce the UK’s national debt and not to improve services for ordinary people. In a freedom of information request, the Treasury disclosed that in 2017/18 the closing balance of the NIF was £24bn, which was used: ‘in practice…to reduce the national debt.’ This deficit reduction comes at a time of austerity where people need more support.
The UK pension system is grossly unfair in a number of ways for those who are currently of pensionable age. Yet, future generations are unlikely to enjoy even basic benefits because of the lack of sustainability of UK pension funding.
The UK state pension has been triple-locked since 2010 meaning that it is linked to inflation, earnings or 2.5% – whichever is highest. This is near universally regarded as unsustainable at current funding levels. The Institute for Fiscal Studies contends that maintaining this is impossible unless the retirement age is raised above 70. However it is telling that the spending priorities of the UK Government lie in deficit reduction and not in increasing the dismal rates of the state pension. From this, it is clear that the UK Government does not prioritise the wellbeing of older people.
Research from the Pensions Policy Institute has found that today’s young people are likely to lose up to 5.2% of their retirement income if the triple lock is scrapped. For instance, a 27-year-old earning an average wage of £19,000 at the age of 40 would have a pension 5% lower if it is linked to earnings alone. The report found this has a disproportionate effect on people with lower incomes.
It is therefore important for both pensioners now and future generations that the value of the state pension increases. An independent Scotland would have the ability to make spending on pensions a priority.
The UK state pension fails on every possible metric. It fails to provide older people with dignity, security and the income to live a comfortable life.
From this it can be unequivocally concluded that the UK Government does not value pensioners. It also seems fundamentally unfair to insist that today’s young people, facing job difficulties, impossible housing costs and lower pay are to fund the retirements of their parents and grandparents who are already better off than they are, when they almost certainly will not be able to enjoy such benefits.
These findings are grim and Westminster has little interest in improving the situation but an independent Scotland would have the power to change the pensions system. The Scottish Government has already suggested several ways to do this, such as bringing back Savings Credit and reversing current Pension Credit changes. Furthermore, policymakers will only have the power to make spending on pensions a priority after independence. However, improvement needs to go further. Reforming the pensions system will require bold and innovative solutions which are only possible under independence with full economic powers, which will be examined in the full report on this subject.
Find a link to the sources consulted for this briefing here