The Liberal Democrats believe the state pension is failing pensioners. Two out of every five pensioners – 2.6 million people – live in poverty and this number rose last year.
The real value of the basic state pension has fallen every year since Margaret Thatcher cut the link between the state pension and earnings in 1980. It is now worth less in real terms than in 1950, and is one of the lowest pensions in Europe.
Reg in Nick Clegg's Westminster office after a discussion about the State Pension
The Government says a single pensioner needs £124.05 a week to avoid living in poverty. However, the full Basic State Pension is currently £90.70 a week. As a result, more and more people who rely on the Basic State Pension to see them through their retirement have to rely on means-tested Pension Credit to survive.
Pension Credit tops up pensioner income to the level of the poverty line. However, over 1.5 million pensioners eligible for Pension Credit do not claim it, and therefore stay living in poverty. Many feel it is humiliating and demeaning to apply for a means-tested benefit. It is also very complicated – more than one in three Pension Credit payments are wrong, and even officials can’t understand the system, as they cause over 80% of the mistakes.
There is also a problem built into the current system for women and carers. Although there have recently been changes so that it will be easier for them to build up entitlement to a full Basic State Pension, there are still going to be millions of women and carers facing a retirement living below the poverty line and relying on top up benefits. The Government expects that even by 2050 nearly 40% of pensioners will still need means-tested top ups.
Such a high level of means-testing is also acting as a disincentive to save. Those who can only save a small amount whilst working may well end up receiving the same pension income as someone who didn’t save because of Pension Credit top ups.
Both Labour and the Conservatives have said they will restore the earnings link by 2015, but we think this is far too late. There are millions of pensioners currently living below the poverty line and waiting until 2015 will not help them. We would restore the earnings link immediately as a first step in reforming the state pension.
However, since there is such a large gap between the Basic State Pension and the Government’s own poverty level, restoring the earnings link alone will not be enough.
The Liberal Democrats would therefore replace the Basic State Pension with a universal Citizen’s Pension based on the number of years of residency in the UK. This would be set at the Government’s poverty line so almost no pensioner would retire with an income below this level.
This would be simpler to administer, would hugely reduce pensioner poverty and, because it would be based on residency, it would recognise the contribution made to society by those who bring up children and care for relatives. In addition, by almost eliminating means-testing, it would restore the incentive for people to save for retirement. You would know that no matter how small an amount you save, it will make you better off in retirement.