By Ben Franklin, Chartered Insurance Institute
This year’s budget came after a period of negative news on the UK economy. Since the Office for Budget Responsibility (OBR) downgraded its economic growth forecasts in November 2011, Moody’s and Fitch have since put the UK on negative ratings watch. There is now a real possibility that Government spending cuts may not prevent the UK from plunging into a double dip recession and, in the process, losing its much coveted triple A status.
In the face of such headwinds, pensioners face a particularly austere environment. As part of a series of publications marking the CII’s Chartered Centenary year, “the man that predicted the financial crisis” George Magnus, notes the way in which economic turmoil is “colluding” with rising longevity to “create serious shortcomings in the adequacy of individual retirement funding and of private pension...schemes”.
Unfortunately, the interaction between the crisis and rising life expectancy is compounded by the UK’s endemic low savings rate. According to research that we published last year, the difference between the income that people will need to live “adequately” in retirement and what they can currently expect is around £9 trillion after factoring in expected levels of pensioner debt and long term care costs. In a best case scenario, the gap still equates to around £4trillion.
In this context then, it is easy to see why the so called “granny tax” – that is the Government’s freeze on age related allowances (ARA) - has caused so much controversy. Freezing ARAs with a view to abolishing them all together is seen, by some at least, as evidence that the Government is prepared to break the ’ring fence’ around age-related spending at a time when pension income is already under threat from the effects of events in the wider global economy.
Yet as the Government seeks to move towards a more sustainable fiscal footing, clearly age-related spending will need to be carefully considered. In this regard, the announcement that there will be an automatic and regular review of the state pension age (SPA) is perhaps even more relevant than the “granny tax” as it paves the way for significant hikes in SPA over the years to come.
Importantly though, if the Government is intent on taking measures to prevent an escalation of public spending on the elderly driven by demographic trends, the coalition must find ways to incentivise increased rates of private long term saving.
In its defence, the Government is making headway through automatic enrolment – although the pushing back of the deadline for small firms until after the next election will significantly reduce its effectiveness. The shift towards a flat rate state pension is also welcome for the promise it brings of a simpler pensions system.
Yet the Government can do more, and the need for a settlement on long term care is a prime example. Retirement planning is difficult enough without the potentially catastrophic costs of care for the one in four that enter the long term care system. While the costs of the Dilnot reforms are an obvious barrier to implementation in times of austerity, the Government cannot reasonably expect to shift responsibility to the individual for their retirement without some form of cap on care costs.
If current rumours are to be believed, the Treasury is not prepared to spend the £1.7bn a year necessary to implement Dilnot, and is instead looking to lower the costs of any settlement by dramatically reducing the size of the cap. Such an approach would clearly fail to be the ’game-changer’ necessary to close the overall funding gap. As Shadow Health Secretary Andy Burnham said at a CII/Reform conference earlier this month, there is surely a substantial political dividend for any Government that manages to resolve the care crisis. It’s time for someone to challenge the Treasury orthodoxy and help secure peace of mind for those entering the care system over the years ahead.
Reforms to improve private saving and a settlement on long-term care will not be enough. The Government must also rethink the nature of work itself to ensure that people are willing and able to work for longer. The end of default retirement age is a start, but it hardly represents a substantive change in the Government’s thinking about the nature of work. According to George Magnus a number of workplace reforms are necessary including “the introduction of phased retirement schemes, new occupational and compensation structures to suit older workers, and a strong commitment to life-long skill formation and retraining”. On this area, the policy debate is only just beginning.
In short then, the controversy surrounding the “granny tax” hints at a significant long-term political and economic challenge. The state will no longer bear the brunt of the costs of paying for the elderly and will try and shift this burden onto the individual. But as the current backlash illustrates, this shift will not be easy and must be accompanied by measures to increase private savings, cap long term care costs and increase provision for flexible working in old age. Without significant success on reforming these elements, limiting state funding for the elderly will become the political football of this century with potentially dramatic fiscal and social consequences.
Ben Franklin is as research and policy officer at the Chartered Insurance Institute (CII), leading the CII’s  research programme on saving for retirement and long term care funding and working on a series of research reports looking at the risks the future will bring to coincide with the CII’s 100th year as a Chartered Professional Body, including a report on the possible social and economic consequences of a global rise in longevity. Before joining the CII, Ben worked as a researcher at HM Treasury, joining in the aftermath of the financial crisis in 2009 and worked on financial stability issues related to the Government’s interventions in the banking sector. He holds a Masters Degree in International Relations from the University of Essex.
CII reports – www.cii.co.uk/research
‘An age-old problem: developing solutions for funding retirement’
‘Who cares? The implications of a new partnership to fund long term care’
Picture: AFP/Getty
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