People in the UK have expectations of a retired standard of living that the nations resources cannot provide, says Icki Iqbal
Our lives come in three stages:
'Learners' are children or trainee adults. Healthcare and primary and secondary education are free. Tertiary education has to be paid for, if necessary through student loans. Taxation and social security policy redresses the balance.
'Earners' are adults who are not burners. They contribute to society by growing the gross domestic product. Most of the time they will be gainfully employed, but not always.
'Burners' are people of an age when society thinks that they do not have to continue activities that are economically beneficial. Their needs are shelter, food, companionship and recreation for the body and mind; and medical care in old age. We can't tell in advance how much is required of each and what form they would take. Worse, they now expect to live longer and care costs are an unanticipated sixth item on the list.
The UK as a whole has an expectation of a standard of living that its resources cannot deliver. So we need a review. A holistic approach would be to assume that each cohort should take out no more than it has put in.
In other words, what you can draw on in retirement would be defined by: what you made while working, less what you cost when growing up. This is a longitudinal approach straddling several parliaments. It is the correct approach but unlikely to be implemented. So we look for other solutions.
Getting the balance right
We have in the UK established the principle that healthcare should be free at the point of delivery. Despite challenges imposed by rising costs, this principle has been maintained.
We have also established a system of incentives to encourage people to make advance provision for retirement so that the elderly don't become a burden on the state. This too has come under scrutiny.
Where should long-term care lie in the spectrum ranging from free at the point of delivery to pay as you consume? It seems to me that in terms of its nature it is closer to the UK National Health Service (NHS) than pension provision and must therefore be free at the point of delivery. The question then is how is the cost paid for?
I think a practical solution would be to say that national insurance (NI) contributions, which at present cease on retirement, should continue right up to death. They would be deducted from income - such as your pension and earnings - but not investment income.
The Blue Book (published by the Office of National Statistics) states that the average income of pensioners in 2012/13 was £477 a week, of which pensions and earnings accounted for £371. The Blue Book defines pensioners as those over 65, not all of whom would have retired. Assuming that all of the 'earnings' are attributable to those not yet retired, the figure reduces to £338 a week.
If 7m of the 8.7m listed in The Blue Book as pensioners are genuine, the aggregate income attributable to pensioners is £123bn.
If they were to pay NI contributions at the current employee rate, 12% of the income in excess of the Lower Earnings Limit (LEL), currently £111 a week, this would generate revenue of £9.9bn pa. That is in excess of the figure of £9bn that Kate Barker, chair of the independent Commission on the Future of Health and Social Care, and a distinguished economist, estimates as the annual cost of long-term care for those 'critically in need' but well short of the £14bn she estimates would be needed by 2025 if extended to those with 'substantial needs'.
Of course, 12% of earnings above LEL would be a painful additional cost to the pensioner. We can try to find ways of reducing it, but the principle that they should pay must be maintained if it is to be free at the point of need.
Preparing for longevity
Suppose we start by saying that those already retired should only pay 6%, but this is increased in half-percentage point steps from 2016 so that those retiring in 2027 would pay 12%. The Treasury could finance the shortfall by tightening up the rules on pensions.
The government thinks people should be free to decide in what form they take benefits under a pension policy. I would contend that a certain minimum level should be taken as an annuity to protect against longevity.
Tax relief should be limited to contributions below a specified limit, set to support a target pension of £18,000 a year, say.
The Centre for Policy Studies estimated that tax relief on pension contributions cost the Treasury £26bn in 2010/11 so there's enough headroom to fund the care shortfall. There are several issues of detail, but these can be addressed once the principles are accepted.
Icki Iqbal is a retired actuary
