Since the financial crash, pensioners have won the race for higher incomes (discounting the mega-rich and their soaring salaries). Official figures show that the government’s triple lock on the state pension, which guarantees a minimum 2.5% rise each year, and the monster payouts from guaranteed final salary schemes have propelled tens of thousands of pensioners up the income scale while the finances of working households languish below pre-crash levels. A report from the Resolution Foundation published today confirms that the average pensioner income is higher than that of a working-age person.
The Office for National Statistics reported that the median income for retired households increased last year to 13% above the pre-downturn levels of 2007-08, while non-retired households have experienced a 1.2% fall.
It means retired BT engineers, school headteachers and middle managers across a wide range of businesses from BP to Unilever, and not Britain’s 31 million workers, are the ones pushing up average income figures. This group of baby boomers worked for employers with generous guaranteed pension schemes and can now enjoy several holidays a year, a 4×4 in the driveway and provide a deposit for their grandchild’s first home.
That might be considered a good thing if it were not for the fact that the cost is unaffordable, is damaging the ability of British business to invest in the future, and fuelling inequality between generations and among the nation’s 12 million over-65s.
Broadly speaking, there are around 4 million pensioners who still rank as poor, 4 million who have middling incomes and another 4 million who grabbed most of the tax relief on pensions and are so comfortable they are desperately under-taxed.
In her series The new retirement, my colleague Amelia Hill has highlighted the difficulties faced by those who struggle financially in retirement or cannot afford to stop working. Economists from across the political spectrum will rightly say the best way to boost the government’s coffers to address growing inequalities is to tax the wealthy, not the incomes of the rich and old. But the politics of the moment rules out attacks on the baby boomers’ accumulated gains from property and investments.
Perhaps the answer lies in an extension of national insurance beyond retirement , a care tax, or more transparently a separate tax regime for those who become eligible for the state pension. In short, pensioner income tax bands.
Pensioner tax bands would have lower thresholds for the higher rate of tax and the 45p rate, clawing back some of the inflated incomes many of the first wave of baby boomers enjoy from their guaranteed final salary pensions.
The 40p rate could take effect on incomes of £20,000 (compared with £43,000 for workers) and the 45p rate at £40,000 (against £150,000 for workers).
Low-income pensioners are not the target. If anything, they will benefit from these funds being recycled back into elderly care and the state pension, though the triple lock should become a double safety net, tying state pension rises to earnings or inflation and not a 2.5% rise regardless.
Instead, the new tax bands are a way to recognise that almost a fifth of the population live on a different economic plain and many have disposable incomes akin to workers on wages twice or three times as high.
Pensioners on incomes above £20,000 a year will usually have paid off their mortgage and have few fixed costs apart from council tax and utility bills sapping their monthly bank balance. Some, we know, will be subsidising children and grandchildren on the bottom rungs of the pay ladder. Many have told the Guardian of their caring responsibilities. But the UK needs to avoid the situation in Greece, where pensions are untouchable because they have become the financial bedrock of extended family life.
The fact is, anyone affected by the new bands would, by virtue of how they secured their bumper retirement payout, have benefited from the biggest ever intergenerational transfer in history.
Until the turn of the century a private or occupational pension was optimistically projected to achieve a level twice or three times what pension providers expect these days. And a pension income, or annuity, costs twice as much to provide. That means the same monthly savings will generate an income in 2017 of around a quarter to one fifth of the income of someone retiring in 1998.
Of course, a higher income tax rate would encourage some workers to delay retirement. There will, no doubt, be other unintended consequences. But if we ignore the problem, the UK can expect to become like Japan, which has seen its government’s debt-to-GDP ratio blow out to 240%. The UK is 15 to 20 years behind Japan in the ageing stakes and is already heading towards 90%. Unfortunately, the UK needs cash from people who have taken – and will continue to take – far more out of the system than they put in.