Means- testing universal benefits for pensioners Key Points: The government currently spends over 4bn every year on Winter Fuel Payments, concessionary bus travel and free TV licences for the over- 75s. These benefits are available to all pensioners, regardless of their income. Means- testing these benefits could save taxpayers over 3 billion every year. Pensioner poverty levels are now lower than poverty levels for other age groups and so it is unreasonable to ask young people to subsidise the older generation s expenses. Introduction Universal benefits for older people have been controversial since their introduction but particularly so since the recession and consequent austerity. At a time when all benefits have been put under the microscope to squeeze out all possible savings, David Cameron has been accused of courting the Grey Vote, 1 by protecting billions of pounds of welfare spending for the elderly, including for the very richest. There have been calls for these benefits to be means- tested and in 2013 there was a campaign to persuade those who didn t need their Winter Fuel Payment to give it back. 2 So far, this has had an uptake of 400 people (out of almost 12 million). 3 In this paper we address Winter Fuel Payments, free bus travel, and free TV licences for the over- 75s, all of which are provided tax- free. IF contends that that benefits should be based on need rather than age. Spreading welfare spending too thinly by providing a benefit to all income levels reduces the amount that can be spent on those who actually require the help. This makes a universal benefit more expensive and less effective in tackling whichever problem it was designed to solve. IF calls for the government to stop using age as a proxy for need, and for these benefits to be provided only to the poorest pensioners. According to the Department for Work and Pensions only 16% of pensioners live in absolute poverty 4 (and a Joseph Rowntree report suggests that this will fall to 12.1% by 2022/23 5 ). Over the last 35 years, pensioner incomes have soared in real terms. Median net income after housing costs has almost tripled. Although pensioners suffered during the recession, the fall in their income was somewhat offset by the triple lock on state pensions (whereby the government guaranteed that state pensions would rise by the highest of CPI, average earnings, or 2.5%). 1 The Independent, http://www.independent.co.uk/news/uk/politics/rich- pensioners- would- keep- winter- fuel- allowance- under- a- tory- government- 10006469.html (accessed: 23/09/15) 2 The Telegraph, http://www.telegraph.co.uk/news/health/elder/10496505/wealthy- pensioners- should- donate- their- winter- fuel- allowance- to- charity- says- Joan- Bakewell.html (accessed: 23/09/15) 3 BBC, http://www.bbc.co.uk/news/uk- politics- 31963099 (accessed: 23/09/15) 4 F. McGuinness (2015), Poverty in the UK: Statistics, House of Commons Briefing Paper 5 Joseph Rowntree Foundation (2015), Where next for pensioner living standards? The Intergenerational Foundation www.if.org.uk charity no: 1142 230 1
Because of this, median net income after housing costs (AHC) was 43% higher in 2013/14 than in 1998/99. 6 (See Fig.2.1. 7 ) Members of the working- age population did not benefit from this financial cushion. To ensure that all of the poorest pensioners are protected, IF suggests that the 20% of pensioners with the lowest incomes (from all sources) continue to automatically receive the universal benefits and then a 50% taper for the next 10% of the lowest income pensioners. The median income for those in the bottom quintile of pensioners was 251 per week for couples and 136 for individuals who were single (between 2011 and 2014) and the median income of the second quintile was 348 for couples and 195 for a single pensioner. 8 There are roughly equal numbers of single pensioners and pensioners who form part of a couple in the bottom income quintile (between 1m and 1.3m of each). This is because the higher number of pensioner couples is offset by a greater proportion of single pensioners having low incomes. 9 Means- testing in this way would be approximately equivalent to maintaining benefits for those people whose incomes are not currently taxed as they are fully covered by the personal income tax allowance. The pensioners in these quintiles unsurprisingly have a much lower percentage of their incomes from investment income or personal or occupational pensions, and so they are clearly in greater need of financial aid in the old age. IF suggests that those couples in the top quintile with an income of 886 per week are less in need than many younger people. Income information should be easily accessible for the government given that all income received by pensioners should be recorded either through PAYE or self- assessment tax returns. The proposed system would prevent any pensioners currently living in poverty from being hit by the means test, whilst preventing any disincentive towards saving by avoiding too sharp a drop off in benefits as income rises. This would constitute a 75% saving for taxpayers, equivalent to over 3bn annually. IF welcomes the savings that will be obtained in the Winter Fuel Payment and travel concessions (in England) due to their link to female state pension age, which will rise over the next 5 years from around 62.5 currently to 66 in 2016. After 2020, however, the costs are expected to rise rapidly as a result of the UK s ageing population. 10 (see table below, Forecast Nominal Cost of Universal Credits for Pensioners. 11 6 Department for Work & Pensions (2015), The Pensioners Income Series 7 ibid. 8 ibid. 9 Department for Work & Pensions (2015), Households below average income: 1994/1995 to 2013/2014 10 ONS (2012), National Population Projections 11 Winter fuel payment and TV Licence forecasts were taken from the DWP s outturn and forecast: budget 2015 report and Bus Concessions are the author s calculations (see appendix). The Intergenerational Foundation www.if.org.uk charity no: 1142 230 2
Forecast Nominal Cost of Universal Credits for Pensioners Cost in billions 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Bus Concessions TV Licences Winter Fuel Payments Year Winter Fuel Payment The Winter Fuel Payment was introduced in 1997/98 in order to tackle fuel poverty amongst pensioners. 12 This is certainly a laudable aim, given that in 1996 there were 6.5 million households living in fuel poverty. 13 Since 2000/01 the Winter Fuel Payment has been 200 for under- 80s and 300 for over- 80s (although it was temporarily raised in 2008 2011) and applies to anyone who has reached the female state pension age. IF strongly supports any action that brings as many people out of fuel poverty as possible, but we do not think that Winter Fuel Payments are the best way of doing this. There are two reasons for this: firstly, pensioners are the age group which is least likely to live in fuel poverty (see graph below). 14 Secondly, there are much better ways of bringing people out of fuel poverty. A cash hand- out to all pensioners, which does not focus on either the fuel aspect or the poverty aspect is not an effective method. It is estimated that only 12% of the money that is given out through Winter Fuel Payments is actually spent on fuel, 15 and if the money were focussed on the fewer than 7% of households with over- 60s who actually live in fuel poverty, it could be much more effective. A far superior system already exists in the form of Cold Weather Payments. The Cold Weather Payments system discriminates by need rather than age, available only to those with low incomes and only when the temperature falls below a certain temperature (0 degrees). 12 Department for Work & Pensions (2014), Winter Fuel Payments Statistics, Background Information note 13 Fullfact, https://fullfact.org/factchecks/fuel_poverty- 27254 (accessed: 23/09/15) 14 Department of Energy and Climate Change (2015), Annual Fuel Poverty Statistics Report 15 House of Commons Environment, Food and Rural Affairs Committee (2009) Energy Efficiency and Fuel Poverty: Third Report of Session 2008 09 London: House of Commons The Intergenerational Foundation www.if.org.uk charity no: 1142 230 3
IF s favoured outcome would be for the Winter Fuel Payment to be scrapped entirely and for the money to go towards increased Cold Weather Payments and insulation schemes (which are far more cost- effective in the long run). However, IF accepts that in the current political climate this is extremely unlikely. Thus, since Winter Fuel Payments look like they are here to stay, we need to view them for what they actually are: a generic income boost for older people. Therefore we should not see it as a tool for moving pensioners out of fuel poverty, rather a tool for tackling general pensioner poverty. If this is the aim, IF believes that it should apply only to the pensioners who are actually living in poverty. If only the poorest 20% of pensioners receive the full amount, and the next 10% receive half of the payment, then it will save at least 1.5 billion every year. Free TV Licence Fee for over- 75s The licence fee dates back to 1922 when it was issued for radio users at a price of 10 shillings per year. 16 Today it stands at 145.50 per year unless someone in the household is over 75, in which case it is free. This is another universal benefit which is completely unnecessary for many wealthier pensioners. Currently the cost of this subsidy is shouldered by the government through borrowing or taxes on the working age population. From 2018, the burden will be moved to the BBC, 17 which is expected to retain this subsidy, either by raising the licence fee, or more likely, by cutting services. It is again the case that IF does not object to people receiving aid in their old age and realises that television is a fantastic resource for many, but we object to blanket subsidies based on age alone, especially at a time of austerity when young people are shouldering the highest burden. The cost of providing this benefit is rising faster than either Winter Fuel Payments or concessionary travel since the population is continuing to age, but this is not being offset by a rising age of entitlement. Thus a means test could save around 2.5bn by 2019/20. Cost in millions Forecast nominal savings due to means- testing TV licences for over- 75s 700 600 500 400 300 200 100 0 2015/16 2016/17 2017/18 2018/19 2019/20 Concessionary Bus Fares Older people also have the statutory right to free off- peak travel when they reach the female state pension age. Further concessions can be granted to any age group at the discretion of local authorities. It costs approximately 1.1bn per year in England alone. 18 Costs are proportionately higher outside of England since Wales, Northern Ireland and Scotland provide the concession to all over 60s, and in addition Scotland provides a greater range of free services. Around 80% of those eligible for free bus travel take it up across the country, with the average cost to the taxpayer of 120 per person per year in England, and closer to 160 in Scotland. 19 16 The Telegraph, http://www.telegraph.co.uk/news/bbc/11603004/the- history- of- the- BBC- licence- fee- by- numbers.html (accessed: 23/09/15) 17 BBC, http://www.bbc.co.uk/news/uk- politics- 33414693 (accessed: 23/09/15) 18 Louise Butcher (2014), Concessionary Bus Fares, House of Commons Briefing Paper 19 ibid. The Intergenerational Foundation www.if.org.uk charity no: 1142 230 4
This concession makes little sense as a universal benefit for older people. A group much more in need is the young, given that the Department for Education has found that the cost of travel is a significant deterrent for young people who are deciding whether they should continue with their education. 20 No official projections for the cost of concessionary bus fares has been provided by the government, so these figures have been constructed based on 2012 ONS population projections, 21 combined with the rising female state pension age in England, an 80% rate of uptake and costs per person rising at the government s target 2% CPI inflation rate. Costs will not fall in nominal terms, however, since the non- English countries show no sign of removing the concession for those aged between 60 and the female state pension age. Thus potential savings under this scheme could be over 1bn per year, reaching a saving of 1.08bn in 2019/20. Cost in billions 1.46 1.44 1.42 1.40 1.38 1.36 Forecast Nominal Cost of Bus Concessions for older people 2015/16 2016/17 2017/18 2018/19 2019/20 Cost of Bus Concessions Conclusion From 2015/16 to 2019/20 the government could save a total of 14.63bn in real terms or 15.48bn in nominal terms by means- testing universal pensioner benefits. It is inappropriate for the richest pensioners to be receiving such financial aid subsidised by the working age populations in a time of severe austerity. Furthermore, being of pensionable age is a weak indicator of financial need, given that pensioner poverty is at record low levels and is now lower than poverty levels among young people. Winter Fuel Payments, free TV licences for the over- 75s and concessionary bus fares are all important to many older people, but for the majority of pensioners they are not a necessity. Appendix Methodology for the cost of concessionary bus fares: Assumptions: Population based on 2012 ONS forecasts of those aged 60 and over in Wales, Northern Ireland and Scotland, and those of female state pension age in England. The number of fares is based on an 80% uptake of passes. The cost of fares is based on a 120 average per person in England, Wales and Northern Ireland and 157 in Scotland. The cost of fares was assumed to rise in line with general inflation of 2% per annum. 20 Spielhofer et al. (2010) Barriers to Participation in Education and Training London: Department of Education 21 ONS, op. cit. The Intergenerational Foundation www.if.org.uk charity no: 1142 230 5
REAL TERMS (2014/15 PRICES) Population 2014 2015 2016 2017 2018 2019 2020 England 11259000 11162500 11065000 10680000 10297000 10203500 10107000 Wales 801000 811000 821000 833000 846000 859000 873000 N. Ireland 380000 388000 396000 406000 416000 426000 436000 Scotland 1284000 1304000 1327000 1351000 1376000 1403000 1430000 No of fares England 9007200 8930000 8852000 8544000 8237600 8162800 8085600 Wales 640800 648800 656800 666400 676800 687200 698400 N. Ireland 304000 310400 316800 324800 332800 340800 348800 Scotland 1027200 1043200 1061600 1080800 1100800 1122400 1144000 Cost of fares England 1080864000 1071600000 1062240000 1025280000 988512000 979536000 970272000 Wales 76896000 77856000 78816000 79968000 81216000 82464000 83808000 N. Ireland 36480000 37248000 38016000 38976000 39936000 40896000 41856000 Scotland 161270400 163782400 166671200 169685600 172825600 176216800 179608000 Total Cost 1,355,510,400.00 1,350,486,400.00 1,345,743,200.00 1,313,909,600.00 1,282,489,600.00 1,279,112,800.00 1,275,544,000.00-0.37% - 0.35% - 2.37% - 2.39% - 0.26% - 0.28% NOMINAL TERMS 0 1 2 3 4 5 6 Population 2015 2016 2017 2018 2019 2020 England 11259000 11162500 11065000 10680000 10297000 10203500 10107000 Wales 801000 811000 821000 833000 846000 859000 873000 N. Ireland 380000 388000 396000 406000 416000 426000 436000 Scotland 1284000 1304000 1327000 1351000 1376000 1403000 1430000 No of fares England 9007200 8930000 8852000 8544000 8237600 8162800 8085600 Wales 640800 648800 656800 666400 676800 687200 698400 N. Ireland 304000 310400 316800 324800 332800 340800 348800 Scotland 1027200 1043200 1061600 1080800 1100800 1122400 1144000 Cost of fares England 1080864000 1093032000 1105154496 1088035338 1069997179 1081486894 1092683863 Wales 76896000 79413120 82000166.4 84862681.34 87910810.31 91046919.36 94381420.03 N. Ireland 36480000 37992960 39551846.4 41361643.01 43228010.74 45152488.53 47136654.22 Scotland 161270400 167058048 173404716.5 180071716.2 187071987.5 194557586.1 202267779.8 Total Cost 1,355,510,400.00 1,377,496,128.00 1,400,111,225.28 1,394,331,378.80 1,388,207,987.91 1,412,243,887.61 1,436,469,716.92 1.62% 1.64% - 0.41% - 0.44% 1.73% 1.72% The Intergenerational Foundation www.if.org.uk charity no: 1142 230 6
Total cost of pensioner benefits was calculated by combining the figures above with the official DWP forecast for the cost of TV licences for the over 75s and Winter Fuel Payments. Total savings of means testing were assumed to be 75%. General inflation was again assumed to be 2% per annum. REAL TERMS (2014/15 PRICES) ( bns) 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Winter Fuel Payments 2.18 2.12 2.06 2.02 1.96 1.89 1.83 TV Licences 0.62 0.61 0.61 0.61 0.64 0.68 0.71 Bus Concessions 1.36 1.35 1.35 1.31 1.28 1.28 1.28 Total Cost 4.16 4.08 4.02 3.94 3.88 3.85 3.82 Nominal Terms ( bns) 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Winter Fuel Payments 2.14 2.12 2.09 2.07 2.04 2.01 1.99 TV Licences 0.61 0.61 0.62 0.63 0.67 0.72 0.77 Bus Concessions 1.36 1.38 1.40 1.39 1.39 1.41 1.44 Total Cost 4.11 4.11 4.11 4.09 4.10 4.14 4.20 The Intergenerational Foundation www.if.org.uk charity no: 1142 230 7