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Cost of the link

Nick Robinson | 10:07 UK time, Thursday, 25 May 2006

It is a quarter of a century since Margaret Thatcher broke the link between pensions and earnings, and in the minds of some pensioners broke faith with them and their right to expect to share in the nation's prosperity.

From that day to this the basic state pension kept pace with prices - rising faster only at the whim of chancellors. The guarantee that as workers grew richer so too would retired workers was at an end.

The link, Margaret Thatcher's ministers insisted, was simply unaffordable. A view scorned by Labour then but years later echoed by New Labour - desperate to demonstrate financial prudence and political virility in the face of insistent demands to spend more.

It was Barbara Castle who first linked the basic state pension to the average rise in earnings in 1974 and she fought - even into her 90th year - to have it restored. Six years ago she roused a Labour Conference still fuming at the decision to raise the basic pension by just 72 pence - the price, she said, of a bag of peanuts.

But Gordon Brown and Tony Blair were unmoved.

"We did reject returning to the earnings link. For the next two or three years we could afford it; but 10, 15 years down the line, it would have imposed a huge financial burden on a future generation that would have been unfair. And yes we do want to do more now for middle and low income pensioners. You do not meet long term need by giving the wealthiest the same help as the poorest," the Prime Minister declared to applause.

What once would have been condemned as the hated means test was now hailed as targeting resources on those who needed them most. Only Old Labour talked of restoring the link.

But outside the Party the political plates were moving and a new consensus was being forged. The country, it was said, faced a pensions time bomb. The young weren't saving for their retirement. The spread of means testing had to be halted. The pensions industry said so, big business said so, the Lib Dems said so. Even the Tories said so. And soon Lord Turner - asked by Tony Blair to address the pensions crisis - would say so as well.

He took up the old cry of the Left that the link between pensions and earnings should be restored. Only that way - he argued - could people have the certainty that if they saved for their retirement means testing wouldn't rob them of those savings. To those who said it was unaffordable, he had an answer. We would all have to work longer.

But Turner still had not convinced the Chancellor. Just 6 months ago Gordon Brown talked privately of shelving Turner, claiming that his sums didn't add up and would force taxes to rise. The battle over whether and when to restore the link became yet another catalyst for yet another Blair-Brown split. The Prime Minister talked of over-ruling the Chancellor. Meetings between the two became so long and so acrimonious that Downing Street officials advised ministers waiting to join them to go back to their offices and to leave them to have it out alone.

Today we see the outcome. A carefully worked deal.

Brown has abandoned his hostility to restoring the link and has agreed to cap means testing. Blair has conceded that the link will be restored later than Turner recommended. 2012 at the earliest but later if - Brown insisted on this wording - it proves (you guessed it) unaffordable.

Does that mean that Brown can tear up the plan if he becomes PM? No, because Blair insisted on some wording of his own. Today's white paper will say that the date for the restoration of the link will be announced at the beginning of the next Parliament. Blairites believe that Brown will come under irresistible political pressure to confirm 2012 in an election campaign.

So, the link which Castle created and Thatcher destroyed refused to die - but the debate about its future is very far from over yet.

Comments

  • 1.
  • At 10:39 AM on 25 May 2006,
  • Rex wrote:

Is it really worth worrying about?
With all the rhetoric that we hear from Blair & co seldom do any of his promises come to fruition.
Like everything else it's probably just another empty promise.
His is not unkind to ALL pensioners......look how well he treats John Prescott!

  • 2.
  • At 11:32 AM on 25 May 2006,
  • Anonymous wrote:

I agree with that first comment and I also know that means tesing doesn't work. I am doing my a levels and this govt has intorduced Educational Maintenance Allowance which is supposed to be means tested- I know someone who gets EMA (between £10-£30 a week and two bonuses of £200 a year just for turning up to lessons) even though her dad is self employed and probably earns double most parents. This just shows that means testing doesn't work and if the government scrapped all these stupid payouts and wastes of money they might be able to afford to give half decent pensions to those who have rightfully earnt them- it will be very interesting to see if Gordon Brown fulfils his promise but it is the likelyhood that he won't and you can bet your bottom dollar that nothing will happen because he doesn't

  • 3.
  • At 12:07 PM on 25 May 2006,
  • Colin Forbes wrote:

Pensions are such an important and central component of our personal economic circumstances that it is unacceptable to see the future of pensions policy and provision become the subject of a personal tussle between two politicians.This is a prime example of policy that should be taken out of the poitical arena and handed to a non-partisan commission.

Further, what is the point of commissioning Turner if his expert recommendations are to be subject to a (non-expert, partisan) pick 'n' mix process? it makes a mockery of all the work thatTurner and his colleagues have put into their report.

Brown had the political courage to make the Bank of England and interest rate policy independent of government: maybe other areas of economic policy such as pensions should be similarly independent.

  • 4.
  • At 12:43 PM on 25 May 2006,
  • Rex wrote:

Just heard the lunchtime debate with Bruce Kent on BBC2 who made a good point that we are supposed to be a wealthy country but the government is reluctant to spend money on those in poverty (pensioners included) yet Blair has recently announced his interest in nuclear power which is totally uncosted and will cost billions.

WHY?

  • 5.
  • At 01:01 PM on 25 May 2006,
  • Chris Wills wrote:

Aren't we being too hard on MP's? How are they expected to understand such a complex problem? Many were only educated at Eton or Harrow and Cambridge or Oxford. And how are they supposed to understand the problems of ordinary working people because they have a brilliant pension scheme - it should be, they voted it in themselves (now there's democracy in action) and they don't even have to work 40 years to get it. Many probably have large private incomes or barrister or doctor pensions as well. Think of the stress they must be under because of the guilt they carry around with them. Maybe Gordon Brown should raid the MP's pension fund to help them better understand the problems we 'normal' people have.

  • 6.
  • At 01:15 PM on 25 May 2006,
  • Paul wrote:
National Insurance

There are a couple of interesting questions which arise in the light of these proposals:

1. When will the reduced number of years for National Insurance Contributions required for a full Basic State Pension come into effect ?
I'm currently paying Additional Voluntary NI contributions and I would like to know whether I'm wasting my money!

2. Why doesn't the government grasp the nettle and admit that NI is merely another form of Income Tax and combine the two. The administrative cost savings would be huge and the abolition of NI would facilitate the
creation of a simpler, fairer and progressive tax system with less scope for evasion.

There is also the related issue of pensioners paying their fair share of
tax. Since pensioners are exempt from
NI and, in many cases have enhanced personal allowances, their tax treatment is more favourable than those at work. This is probably unsustainable and will in time engender resentment from those of working age.

  • 7.
  • At 01:31 PM on 25 May 2006,
  • Tom Maxwell wrote:

No one should rely on the state pension, you have to make you're own provisions if you want a comfortable retirement.

My advice is to work hard, invest your money in property then downsize when you retire.

A state pension will leave you on the bread-line.

  • 8.
  • At 02:00 PM on 25 May 2006,
  • John Portwood wrote:

I would take issue with Paul. Pensioners have paid tax on their income for the past 40 years or so - often at higher rates than today. The National Insurance Contributions they paid should have been used to fund their pensions but were used to fund pensions of the previous generation. Now it appears the Government is going to do the same thing by adding an additional 7% tax on income (3% employer, 4% employee). Why not just increase the NI contributions? Answer - poltical suicide.

As an employer myself, I am going to have to find an extra 2% of income - where my mark up is only 10-15%. Virtually impossible without increasing my charges to customers. Other businesses will have to follow suit so customers will end up paying the full 7% somehow. TANSTAAFL - There aint no such thing as a free lunch (unless in the public sector of course).

  • 9.
  • At 02:02 PM on 25 May 2006,
  • noel wrote:

I just don't trust any politician (especially this lot) to handle our money in any way. National Insurance started out as insurance, and has turned into a tax. The same is happening with SERPS. Why should we believe the current proposal will be any different ?

  • 10.
  • At 02:04 PM on 25 May 2006,
  • Emil Wisekal wrote:

I wonder how this compares to our Social Security payout in the USA? Can someone offer an analysis?

We are already retiring later here. At age 49, I am required to work till 68 or 70 before full 'pension' kicks in.

The talk of politics in your coverage is familiar: Social Security is politically sensitive here. It is still 100% government annuities, but there is talk of making it private...

  • 11.
  • At 02:59 PM on 25 May 2006,
  • D MOORE wrote:

YESi well remember Mrs Thatcher's
PENSION CUTS, who could forget, still
although it will not benefit me
personally, it will restore some
hope for future generations, at the
present I FEEL SO SORRY FOR THE MANY
ELDERLY WIDOWS AND SOME SINGLE LADIES
THOSE OF THE WAR GENERATIONS WHO WILL
NOT BENEFIT HAVING LOST SO MUCH THAT
THIS PRESENT GENERATION TAKE FOR
GRANTED

  • 12.
  • At 03:07 PM on 25 May 2006,
  • dn wrote:

Nuclear power is "totally uncosted and will cost billions" - interesting...

otherwise I'd agree with looking again at how to deliniate NI and income tax - if it's not technically an 'insurance' (whether in case of old age or unemployment) pot, but general money, what's the difference?

  • 13.
  • At 03:13 PM on 25 May 2006,
  • Hayden Clark wrote:

So you will be able to "opt out" of contibuting to your pension? If so, when assessing your income for benefits, you should be assessed based on the assumption that you have contributed. If you opt out to fund your own pension, that's fine. But if you opt out to have more cash now, that's short-sighted, and under the current arrangements will be rewarded by the Minimum Income Guarantee. The knowledge that "They" will always look after you, however feckless you may be does nothing to encourage saving.

  • 14.
  • At 03:15 PM on 25 May 2006,
  • E. Wilson wrote:

As a divorced woman with time out for child-care I am very worried about my pension prospects. Trying to match work and child-care I have had to take part-time work or pay extortionate fees to child minders (pre help with child care)This usually matched my earnings. (one reason in the past for signing on).
Unfortunately their was a system created to pay for pensions and healthcare this was called National Insurance but various governments found better use for the money collected than caring for the population. Even when people saved for pesions a certain Chancellor decided that he could find better use for the money than those saving it. This and future governments should keep their sticky fingers out of schemes created to pay for the care of the nation. Then perhaps english people could receive the same level of care as our welsh and scots neighbours.

  • 15.
  • At 03:21 PM on 25 May 2006,
  • George Hinton wrote:

Its tinker, tinker, tinker. We would do well to recall the smash and grab raid on pensions that Gordon made, costing £5bn per annum. This is a bit of a fudge, between Blair and Brown, that creates inequalities between public and private sectors, and a victory for the bloody-minded unions. Placing more levies on the employer may well result in less jobs becoming available and our economy looking like France with high youth unemployment. A good day though for the politicians, they keep their gold plated pensions and the trough is still there for them.

  • 16.
  • At 03:35 PM on 25 May 2006,
  • Martin wrote:

If this becomes law where will the contributions go - will they be ring fenced to keep the Treasury from spending the money on something else?
Isn't that what NI is supposed be about - NHS and pensions? It is now just anothe tax for the Treasury.

  • 17.
  • At 03:44 PM on 25 May 2006,
  • D Thomas wrote:

Are we forgetting that Labour has lifted 2 million pensioners out of absolute poverty and 1 million out of realtive poverty?Thanks to intiatives like Pension credit and winter fuel payments the poorest pensioners are now £1900 a year better off! Where were the stories in the media of pensioners freezing to death this winter? I'm tired of people ignoring the vastly improved society we live in now thanks to Labour and slating the current Government without giving a real alternative. Would we be better off with Cameron in charge? A tory is a tory is a tory. I just hope the British public aren't shallow enough to fall for his glossy facade and miss the reality of a man who wrote the racist conservative 2005 election manifesto!

  • 18.
  • At 04:03 PM on 25 May 2006,
  • RAY wrote:

Two comments. Labour will lose power next time round so all this reform is hot air and also I am so glad to be nearly 60 !!!

  • 19.
  • At 04:45 PM on 25 May 2006,
  • andy williams wrote:

This is New Labour 'spin' at it's worst and one of the reasons why after voting for them at every opportunity since 1976, I will never vote for them ever again while so much as one Blairite remains (including Brown). Blair, by mentioning 'not before 2012' and also linking it in to 'announced at the next Parliament' has effectively dodged the issue and dumped the lot onto Gordon the clone's lap. He in turn will find some way of reducing it or binning it all together. When you look at this properly, absolutely nothing has been confirmed. Total rubbish and another whitewash

  • 20.
  • At 05:56 PM on 25 May 2006,
  • Helen wrote:

I was recently at a pensions conference where Lord Turner spoke. He mentioned that although he didn't get thanks for it at pensioner conferences, todays pensioners are better off than previous generations and are likely to be better off than future generations, thanks to occupational schemes. Most final salary schemes are now of course closed to new entrants and in some cases to existing staff.

Although Lord Turner states that it would only cost an extra 1% of so of GDP to finance earnings-linked pensions, the BBC pointed out this morning that this additional sum was 25% of the current annual NHS funding.

I fear that when the time comes, the government will discover that the promise of linking pensions to earnings is indeed unaffordable.

  • 21.
  • At 07:39 PM on 25 May 2006,
  • Anonymous wrote:

Whole Labour movement now waste of time. Blair and Prescot will look after their pockets.

  • 22.
  • At 10:46 PM on 25 May 2006,
  • J. Hallsworth wrote:

There is still no incentive for large numbers to save if the state still
provides for those who don`t save. We do need to provide a basic safety net but means testing those who save is simply a transfer of money from those who save to those who don`t-pure Brown.Scrapping means testing totally will encourage the saving which is so vital for Turner to succeed.

  • 23.
  • At 11:05 PM on 25 May 2006,
  • Colin wrote:

How will today's pensioners pay the present and coming increases in fuel bills and council tax???
I am 67 and on bsp, Today's announcement will do nothing for me but the bills WILL rise!!!

  • 24.
  • At 11:22 PM on 25 May 2006,
  • Stephen Felce wrote:

My concern is existing pension provisions being changed that are not an obvious consequence of the new pensions proposals. If this happens, will it be properly publicised or conveniently hidden?

(This after all, is often an issue raised repeatedly about Gordon Brown. It happens after each budget when BBC commentators invariably follow up with the "catch-you-out measures" they have found buried in the documentation.)

For example, I am aged 62 but retired early at age 60, so get automatic NI contribution credits to age 65, the current normal retirement age.

Will this change as there is no obvious reason why it should? And if so, will it be clear that there has been a change and what the consequences of it are? Or will I be left to believe that this provision has not been changed when in fact it has, with serious consequences?

Other, younger people, may be considerably more at risk to this ruse of the Chancellor's, of course.

  • 25.
  • At 11:24 PM on 25 May 2006,
  • Ken wrote:

The state pension has always been sustainable, so what has changed?
Apart from people living longer, no
one seems to question the extra and
unproductive people dipping into
the resources meant for those who
have played by the rules, and what has happened to the Chancellors
sound economy statements, I don't recall reference to a shortfall in the 'Pension Pot'.
Don't worry, Mr Blair, I will work till I drop, to keep others in the style they are accustomed, and I might see 11 years of well earned quality retirement?
Perhaps you have other plans?

  • 26.
  • At 08:26 AM on 26 May 2006,
  • Nick wrote:

Born in 1960 it looks like I'll have to wait an extra year for my full state pension. Hey ho.
I do not understand how the link to earnings is "calculated". Average earnings over n years? Final salary? Are "points " accrued over years - What? Can anyone direct me to a website with answers?

  • 27.
  • At 02:51 PM on 26 May 2006,
  • John Kanefsky wrote:

In reply to D. Thomas, Labour has lifted no-one out of "absolute poverty". While not wishing to belittle the pressures of those living on low incomes, nobody in the UK lives in absolute poverty (defined by the World Bank as less than $1 a person a day). Poverty in the UK, as in the rest of the western world, is measured in terms of "economic distance", a test of income inequality equating to a family living on below 50% of the median household income, roughly £14,000 a year or £220 a week after tax. Also by the nature of the measure, the the threshold goes up ever year by about 4%, i.e faster than inflation!!

  • 28.
  • At 10:36 AM on 27 May 2006,
  • Andy W wrote:

Fixing the pensions crisis is easy - make everone an MP or a civil servant - then nobody would have to worry. If the nation can afford generous pensions for them then I am sure they can afford it for the rest of us.
As for recent pronouncements - if Blair's lips were moving you know the output is likely to be misleading.
Ask Blair/Brown what they did to their pensions just before Easter (so that no questions were asked).

  • 29.
  • At 01:43 PM on 27 May 2006,
  • David Andrews wrote:

The announcement about the future of pensions does nothing to remove the power of governments of all persuasions to treat pensions in a totally arbitrary way e.g. if one emigrates to some countries, but not others, the state pension is frozen (not even increased in line with inflation).
At present governments are able to discriminate against certain sections of pensioners just as they like - there should be legislation that protects them from what is cowardly behaviour - politicians know they can get away with such behaviour simply because the numbers affected are small and have no rights.

  • 30.
  • At 10:05 AM on 30 May 2006,
  • Russell Long wrote:

"Are we forgetting that Labour has lifted 2 million pensioners out of absolute poverty and 1 million out of realtive poverty?Thanks to intiatives like Pension credit and winter fuel payments the poorest pensioners are now £1900 a year better off! Where were the stories in the media of pensioners freezing to death this winter? I'm tired of people ignoring the vastly improved society we live in now thanks to Labour and slating the current Government without giving a real alternative. D Thomas"

Hello Labour Party HQ! How are you doing up there?

Firstly, Mr Thomas, the term 'poverty' is bandied about in the UK, so what is 'relative' poverty? Well, what it actually means is that your earnings are below average. But for that average to EXIST, someone has to be below it, and someone above. Otherwise it couldn't exist.
So the 'poverty' term is false. Not only that, but 'poverty' here in the UK is not poverty. It doesn't mean that you have to walk 10 miles for fresh water, or that you have no food. Let's get this in perspective.

Incidentally, the Socialist Revolution has had 10 years to work. What have we seen? Small business and personal bankruptcies are at their highest rate since 1992. Labour might not realise this, but small businesses run the British economy, and you're killing them. These new pension plans hammer yet another nail into their coffin.

I run a small business. I've seen my taxes rise every year for 7 years. I'm now paying twice what I was 3 years ago, and three times what I was 7 years ago. Labour is killing my dream, and the dream of millions like me, to keep the Unions happy.

  • 31.
  • At 01:16 PM on 31 May 2006,
  • Geoff Lezemore wrote:

Based on personal salary adminstration experience I believe that in the long run, incomes do not increase exponentially (too high a rate) or by simple absolute £ amount (too low a rate). The real result is somewhere in between. I therefore suspect that "earnings related" will not be viable in the long run, say, above 10 years, nor will "prices related". Why isn't some evidence based approach devised rather than simple executive decision making, appraently based on opinion?

  • 32.
  • At 02:35 PM on 05 Jun 2006,
  • Colin Wilcox wrote:

Two questions remain which I dont seem to have found answers for.
(1) Will this new pension scheme remain means tested thus penalising those who save extra for their retirement and
(2)Once a person has paid in the 30 years required to get the full state pension, will NI payments stop or at least be reduced?

  • 33.
  • At 07:27 AM on 07 Jun 2006,
  • Terry Sofflet wrote:

To try and answer Emil Wisekal's question regarding pensions in the USA.
People born 1938 and before received pensions on reaching 65.
People born 1938 to 1948 had 2 months added to pension age for each birth year. ie born 1943 pension on reaching 66, born 1948 pension on reaching 67.
To earn a pension requires 40 points. You can earn a maximum of 4 points per year. Each point requires 900 dollars of earned income. Your pension is then based on your total contributions, the more you contribute the more you get.
I have qualified with 40 points over 10 years and my USA pension will be greater than my English pension after 44 years contributions.

  • 34.
  • At 12:49 PM on 01 Jun 2007,
  • Rick wrote:

Nothing will change, this is just another headline grabing stunt by a government still trying look like it is actually doing something.
Brown has spent the last 10 years dreaming up new ways of taxation, and then letting it all go to waste.
What is the point of taxation, if not to fund public services? Why do hospitals have to break even, Post offices to close as unprofitable, the price of obtaining a Passport to rise and rise because of increasing costs, Employment Service offices closing as uneconomic, roads in a disgraceful state,Pensions?.... just add them to the list of government incompetence
Just where is all our hard earned going?

  • 35.
  • At 08:36 AM on 29 Jun 2007,
  • robert crawford wrote:

It is to the everlasting shame that a labour party must lie about the affordibility of pensions as all that is required is for the million pound a year earner to contributethe same NI cons and tax as everyone else

Most of the comments above are from males, yet females are much worse off with regard to pensions, and the wives of senior military officers are worse than anyone. Because not only are we not paid for the work on the stations we are forced into (not housework) but we are cheated out of the Pension we were promised, by a fraud.
Military officers are unlikely to obtain a promotional post unless they can lie and trick a woman to marry and travel the world with them.

The wives work very long hours regularly 20 hours a day, weekends included, without pay. When the children start school and we wish to earn some money of our own we are told that we can go but the children stay with their father as he has automatic custody with no access.
Then near retirement, we are posted to a HQ unit where we are subjected to a contrived divorce and are advised to visit the Citizens Advice Bureau for a solicitor. Unbeknown to us the MoD had planted an ex-Wing Commander as manager in the CAB who processed all the special wives through the next door solicitor, where we are asset stripped with a vengeance. No pension or substantial gratuity, (intended for house purchase) very few of our personal possessions, but worst of all we never see our abducted and brainwashed children again. It took me years to discover the successful because it was so simple fraud, who would ever suspect the CAB? Then I persuaded the Head of the CAB to change the managers to female in the whole of the UK.
Naturally the solicitor lost his nice little earner as he was cornering the local market in Legal Aid certificates, therefore he was compensated by being promoted to be President of the Law Society, I was told, thus ensuring that no other solicitor would dare to take our case to sue him. We are the most poverty stricken people in this country, and have spent many occasions literally starving for days. Now when we receive the State pension we are a little better fed but we still have not seen the children we produced, loved and to whom we were virtually lone parents.

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