Those who wonder about the economics of the state pension should note that the triple lock applies to all state pensioners, regardless of income or wealth. This promises that their pension will increase every year in line with inflation or with average wage increases, whichever is the higher. The triple lock guarantees that it will rise by at least 2.5% yearly if neither of the other two other measures reaches that level.

A note from my friend illustrates one of the consequences of this promise.  He reports that his state pension, plus his winter fuel allowance, plus his Christmas bonus, came to £5,420 a few years back. Since this could buy him a bottle of supermarket brand champagne every day at about £14.85, he dubbed it his champagne fund.

He wrote following the latest increase to report that the total per annum now going into his champagne fund comes to nearly £8,300, or £22.74 per day. Whereas before he could only afford a bottle of Tesco’s or Sainsbury’s house champagne every day, he can now manage a decent named brand.  Indeed, he says, if he goes slumming on Sundays with a bottle of Sainsbury’s best champagne, on each of the other 6 days of the week he can afford a bottle of Veuve Cliquot.

I should add that he is a multi-millionaire with a flat in London and a house in the country. As the outrage levels rise, let me point out that he gives generously to charity, and justifies keeping the money because he thinks he is a better judge of worthy recipients than the state is.  I do not begrudge him his champagne fund, and I note that he occasionally thanks me and other taxpayers for our generosity. But I cannot help wondering if the founders of our welfare state intended this consequence when they first established it?

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  1. Presumably your mate pays higher rate tax on his state pension. We could introduce an element of means testing, if we wished, but (given that it would be done by the public sector) I’m confident it would cost more than it would save.

    The Christmas bonus (got my first one this year, which came as a surprise, a mystery £10 ‘magically’ appeared in the bank account) is daft – I bet it costs twice as much to pay as its face value, and a tenner isn’t going to make much difference to most people’s Christmas.

  2. The founders of the welfare state *did* intend this consequence, they held religiously to the doctrine that means testing was purest evil, and in the absence of means testing, everybody receives regardless of their means.

    They magically manage to cling to this doctrine simulteneously with “to each according to their needs”.

  3. I suspect its founders knew they could not get the entitlement passed if their promises allowed the possibility of reneging on them for pensioners who had had a long and productive career, a sort of, “If I win, I lose!”

    Regardless of Richard’s overt appeal to envy, if his friend were cut off because we opened a national debate on whether or not each individual really needs government to keep its pension promise, less for Richard’s friend means more for — not us but demographic groups more reliable to vote to keep the whole Ponzi scheme alive.

    In the US, the actuaries recently brought the Social Security system’s exhaustion three years closer. Everyone is discussing the need to recruit younger Americans, thankfully no one is discussing ways to rid ourself of the older ones, and no one ever mentions that the fund was long ago stretched to support the con job called “permanent disability,” now including alcoholism, ADHD (moodiness), and failure to speak the dominant language of the area. This last didn’t used to be thought permanent.

  4. As is clearly the case, the state pension is a pension (and so an entitlement) and means-tested welfare benefits are not (an entitlement).

    However, interestingly in the case of the state pension, the contributions that fund it are not the same for everyone. Those earning more (over a range for NICs) actually pay more for the same (years of entitlement). In addition, those earning more pay more in Income Tax – without limit and on a scale of ‘progressive’ income tax. So the richer ex-workers get the same as the poorer ex-workers (as state pension) though they actually have paid more for that ‘same’ – and probably continue to pay more tax on that same (the latter of which is definitely reasonable with me).

    Rather interestingly, I note that Tim Worstall, and his colleagues at the Adam Smith Institute, are rather keen on the concept of a Basic Income (part of their third key policy); that (as far as I can understand) is pretty much the same – those in the UK with multi-million pound incomes or none get the same, but they are then taxed differently. All this (IIUC) to avoid the ‘difficulties’ of means-tested welfare benefits.

    I’m struggling to see why Tim has raised the issue at this time and in this particular way. Maybe real news is in short supply and the usual August silly season has come early. Oh but wait: most news now seems to be non-news. And a glass of something daily is a help to dull that pain.

    I will concede that one thing on the state pension triple lock is bad – even though that might become to my personal disadvantage. The minimum annual increase of 2.5% looks to me to have no justification beyond (some earlier and perhaps repeated) buying of votes. I do however favour a floor on the increase (at 0.0% pa – so no decrease).

    Best regards

    • Just to avoid confusion and dispute, the ASI’s policy is actually third in that document to which I link, but lower down under: key policies for “Free Market Welfare”. Just click to the linked document and then search for “basic”.

      Best regards

    • Nigel, to be clear, Tim has not “raised this issue,” as this column is from contributor Richard; Tim has done no more than administer the usual free-for-all of ideas.

      I am no expert on NIC, but it seems very similar in structure to the American FICA (Federal Income Coverage Act), which has capped payroll taxes and therefore capped payouts. President Clinton signed a law subjecting half the payout to taxation, over a certain amount. Medicare/Medicaid are transfer payments also funded by payroll tax, and Obama uncapped that portion of the payroll tax (as well as doing everything else he could to harm high achievers).

      You call the state pension an “entitlement” — essentially the return of one’s own funds. In the US at least, baloney. Your funds were stolen and spent, decades ago, and the entire public debate now is about whom to steal from next to make you whole. Pensioners (and military veterans) have a greater moral claim than Mexican border-jumpers, but each group is essentially begging. And Mexican illegals vote (illegally) for the continuation of the welfare state, so good luck.

      • Hi Spike, thank you for the correction on Richard’s journalistic byline. My apologies to both Richard and Tim for my mistake.

        I think one might be allowed to assume that the Editor-in-Chief is somewhat implicated in the acceptability (even desirability) of content of published articles, but I definitely would not take the view that individual authors/journalists here are mere lackeys. Thus my implied point of Tim probably suffering from cognitive dissonance, on state pension versus basic income, is invalidated; I substitute a likely disagreement between Richard and Tim

        Concerning UK NICs and the American FICA, I am at least as ignorant of the latter as you state yourself of the former. I do know that all UK pensions (state and private) are subject to income tax (and I believe always have been). However, the maximum individual state pension is now below the UK personal tax allowance, so is not (usually) taxable unless you have significant further income (pension or otherwise). This looks to be different (at least in detail) from what you describe for the USA under both Clinton and Obama. Also, NIC’s are only payable up to age 65 and only on employment income (or alternative benefits WRT employment that are really only attempts to avoid that tax) – so there are no (directly attributable) payments for NHS healthcare from age 65. However and overall, I don’t understand (at all) what point or points you are trying to make WRT the American scheme or its differences from the UK scheme – and particularly WRT my comments above.

        On use of the word ‘entitlement’: in this rather narrow context, I meant that to be in opposition to any ‘means-tested’ welfare benefits. The UK state pension is actually only an entitlement in the broadest sense if one has paid NICs for enough years (and according to how many years). The arrangements are complex; I don’t understand those that have not applied to me, but I do know they include notional periods of assumed payment in some circumstances – including period credits for being in full-time education past the age of 18 (or maybe 16).

        On your “essentially the return of one’s own funds. In the US at least, [that is] baloney.” The same or similar is true in the UK: the UK state scheme is not a proper pension fund (combined with health insurance); it is a Ponzi scheme, at least in part. However, the government has been paying it for the whole of my like and more, and keeps on promising to do so in the future. This looks to me like an ‘entitlement’ – as much as do the funds in my current bank account (USA checking account): it is until it isn’t – the latter being an exceptional circumstance.

        Best regards

      • Nigel, most of my post was not indeed a rebuttal of what you wrote.

        In the case of Tim, because he allows posts here whether or not he agrees with him, inferring his opinion is ineffective (as well as irrelevant).

        The US and UK seem to have similar policy in that most of the government pension is effectively exempt from tax. I agree, it looks like an entitlement, but it is not in fact a return of one’s own funds. The difference is that, despite fractional-reserve banking (loaning out your funds several different times at once), your US bank will very likely be able to return all of your funds to you (with federal deposit insurance doing so even if the bank fails), whereas Social Security is unsustainable and about to become an overt drag on the budget in short order. Pensioners vote in high proportions and their monthly check is their biggest concern, so righting the ship is likely to be done with stealth. If they deliver the promised payout, it will be in increasingly worthless dollars.

        Unlike the UK, another of Obama’s assaults on investors was to extend the “payroll tax” to income that is not payroll — currently, only to high-achievers (which he calls “the rich”), but applied not just to their high achievement but to their total income. (Their achievement was not the problem; their existence was.) This would have been undone by “Repeal Obama-care”; under “Repeal and Replace,” who knows? but even this fizzled.

        • I have no knowledge of the US system, but UK pensions are not ‘exempt from tax’. They are (possibly coincidentally) much the same as the ‘tax free allowance’. So it might be considered that I receive my state pension ‘tax free’, but when it started, the tax on my private pension increased substantially.

  5. The Winter Fuel Payment and Christmas bonus should be incorporated into the regular state retirement pension.
    If you ran the logic the other way would anyone say it’s a good idea to take £5/week off pensioners and then pay it back to them in two or three lump sums in winter. ‘No, we’re adults, we can budget accordingly’, they would say, ‘let me decide when and what it goes on’.
    But we’ve arrived at this stupid situation where we presume many pensioners are suddenly incapable of knowing winter comes every year when they reach 67, so we micro manage their lives with seasonal payments, and impose a cost on everybody else to administer it.