The Intergenerational Foundation has formally called on Prime Minister Andy Burnham to introduce means-testing for the State Pension, targeting wealthier retirees as part of a major overhaul of the Department for Work and Pensions (DWP) system. The recommendation comes in response to the Second Pensions Commission Interim Report, highlighting the growing income gap between pensioners and younger generations.
Key Proposal: Targeted State Pension
The Foundation urges the Government to shift toward a more targeted State Pension by exploring options to reduce or eliminate entitlements for the wealthiest retirees through income and asset testing. The report warns that a “possible option” is the introduction of a means-test for the State Pension, a move that would represent a significant policy change.
According to the Intergenerational Foundation, means-testing would improve fairness between generations by counteracting the divergence in incomes between current pensioners and those of working age. It would also increase intra-generational fairness by addressing inequality within each cohort of pensioners.
Income Inequality Among Pensioners
The Cridland Review Interim Report, referenced in the Foundation's submission, reveals stark income disparities among pensioners. Figure 10 of the report demonstrates that the state pension accounts for only 34% of the incomes of the richest fifth of pensioners, but represents almost the entire income (94%) of the poorest fifth. This disparity underscores the potential for more targeted support.
The Foundation argues that means-testing the state pension could enable spending on pensioner benefits to be kept sustainable while also allowing the government to do more to help the poorest and most vulnerable pensioners. The report states: “Although means-testing is controversial, IF believes that this outcome would be desirable for several reasons.”
Burnham's Policy Stance
Prime Minister Burnham has pledged to shift power away from Whitehall, introduce greater public control of water and energy sectors, and build more council houses. He has also committed to keeping Labour's election pledge not to raise the main rates of income tax or National Insurance, and promised to provide "breathing space" for households struggling with the cost of living.
The call for means-testing comes amid ongoing debates about pension sustainability and intergenerational fairness. The Intergenerational Foundation's recommendations are part of a broader consultation on the future of pensions, with the Second Pensions Commission Interim Report serving as a key reference point.
Potential Implications
If implemented, means-testing the State Pension could significantly alter the financial landscape for wealthier retirees, potentially reducing their entitlements based on income and assets. This would mark a departure from the current universal system, which provides the State Pension to all eligible retirees regardless of their financial circumstances.
The proposal has sparked discussion among policymakers and pension experts, with some viewing it as a necessary step to ensure long-term sustainability, while others express concerns about the complexity and potential disincentives of means-testing. The Intergenerational Foundation maintains that the benefits would outweigh the drawbacks, particularly in terms of fairness and targeted support.
As the Government considers its response to the Second Pensions Commission Interim Report, the future of the State Pension remains a pivotal issue. The Intergenerational Foundation's call for means-testing adds to the growing pressure on the Prime Minister to address pension inequality and ensure the system is fit for the future.
