IEA Cuts for Oldies

Professor Philip Booth and Corin Taylor of the Institute of Economic Affairs (IEA) have just released a discussion paper, Sharing the burden - How the older generation should suffer its share of the cuts. The IEA states that “... the government could save £16bn a year by cutting non-means-tested benefits to older people and reforming the state pension system.”

The paper addresses seven different areas for savings but oddly does not draw the conclusions together in a summary table, so I’ve supplied one below:

I have also attempted to identify the age limits for the impact of these measures in 2015. Raising the state pension age by 6 months in each of 2014 and 2015 to 66 obviously affects all who have not retired by 2015. (Currently men retire at 65 and the retirement age for women is planned to increase from 62.5 to 63 between April 2015 and April 2016). However, the age below which the impact becomes negligible is difficult to estimate – 15 years before retirement?

The extensive section addressing comprehensive pension reform does not identify any potential expenditure savings – it would be better as a separate discussion paper. On the other hand, more research into some of the other items would have been of value. For example, when were free bus passes and the winter fuel allowance introduced? It could be the case that the more recent a benefit, the less painful its removal.

It is a matter of political judgement as to whether the ire of a particular group in society and consequent loss of votes is worth incurring. However, the measures appear to range from the electorally difficult but economically realistic – abolishing free bus travel, to the barking – making people over 75, the majority of whom are widows, pay for television licences.  Another major issue which the IEA paper does not address is that of National Insurance (NI), not paid by the retired.  Out of a salary of £30000 from which income tax of £4705 is deducted, someone under retirement age pays a further £2671 in NI.

The paper would probably been of more use to policy-makers if measures such as the benefit to the exchequer of taxing, rather than abolishing, the winter fuel allowance had been assessed. Similarly, confining bus pass use to journeys which at least begin or end in the local authority of issue might be preferable to complete abolition. However, the IEA takes a consistently uncompromising view of the world – they can’t help themselves footnoting, when discussing TV licences, “We ignore, here, whether it is desirable to have what is effectively a state broadcasting service financed by a tax on televisions.”

Realistically the economic prospects for the UK suggest at best a slow arduous recovery by 2015. At least some of the measures identified by the IEA may have to be adopted, if only partially. If things go badly wrong in the Gulf, which doesn’t seem impossible at present, we may have to accept much worse.