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Brown is set to restore pensions link to earnings By Rob Griffin
Gordon Brown will finally bow to public pressure and restore the link between the state pension and earnings in a desperate attempt to guarantee people a decent standard of living when they retire.
The Chancellor had previously insisted
As Moneywise went to press, Gordon Brown and Tony Blair finally reached an agreement - in the wake of Lord Turner's call for the link's restoration. Brown is now expected to detail his plans in the Government's forthcoming White Paper on pension reform.
Positive reaction
The initial reaction to the news has been positive. Tony Woodley, general secretary of the Transport and General Workers Union, said he was pleased - as long as the policy wasn't confined to those aged over 75, as some reports have suggested.
"Restoring the link between the state pension and earnings would reverse one of the most spiteful legacies of the Thatcher era," he added.
The proposals suggested by Lord Turner in his capacity as chairman of the Pensions Commission - of which Brown apparently agrees with up to 95% - would see the link restored from 2012 as part of a package of measures costing around £8 billion a year.
It is also thought the move will be accompanied by an increase in the retirement age to 68 by 2005 to help foot the bill.
Can we afford it?
However, many questions still remain unanswered. Can we afford the extra costs? Will it actually solve the growing pension crisis anyway? Isn't there a simpler way to keep everyone happy?
The National Pensioners Convention (NPC), in particular, has some reservations. While it's pleased that the topic is under discussion, it insists that it won't do much good restoring the link with earnings from the current pension level because it is at such a low level.
Instead, the NPC wants to see the basic single pension increased from £84.25 to £114 - before the link is restored - and points out that this will still be far less than people would be receiving now, had the policy never been abolished.
"If the link hadn't been cut back in 1980 then today's pensioners would be getting an extra £52.50 a week, which means we wouldn't even be talking about poverty," said an NPC spokesman.
Stealth taxes
But how are the costs of such a move likely to be met? Even in spite of the money saved by raising the state retirement age, Dr Madsen Pirie, president of the Adam Smith Institute, is convinced that any policy which embraces a restoration of the link with earnings will mean higher taxation over the coming years. "Gordon Brown will raise the money in the same way as he always does - by increasing taxes, borrowing more and plunging the economy deeper into trouble," he told Moneywise.
"He particularly likes stealth taxes and may try to alter the application of the tax rules, so that people who have previously been exempt suddenly find to their surprise that they now have to pay hundreds of pounds to the Treasury," he added.
Pirie also described the move as a 'sticking plaster job', designed to get the Government through a temporary difficulty.
So what do people want?
A global study by HSBC reveals that 37% of people would actually be in favour of the Government forcing them to make additional savings.
The bank's Future of Retirement study found that while one in three people felt the Government should meet their costs in retirement, only 21% thought it would, which meant people needed to be given a push in the right direction.
Stephen Green, chief executive of HSBC Holdings, said: "The research shows individuals increasingly expect to bear their own costs in later life, but governments and business must understand their role in continuing to support individuals."
For Tom McPhail, head of pensions research at Hargreaves Lansdown, there is a far simpler answer to the problem.
"While I can see it would be beneficial to some pensioners, the plan seems very complicated and we want simplicity," he said. "The only long-term answer is to have a more generous, universal state pension."
A Treasury spokesman said the White Paper was due out shortly, but declined to comment further on what it would contain.
How policies have hit pensions
Q: What is the single state pension today? A: £84.25 Q: How much would it be if the link had never been cut? A: £136.75 Q: What level would it be if Labour had restored it back in 1997? A: £91.75
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