The City should devise new home income plans and capital- releasing financial packages. And the Government should strive to change attitudes so that middle-aged people do not automatically expect to inheritcapital assets when their parents die.
The idea has been floated by David Willetts, Tory MP for Havant, a former member of the Downing Street policy unit and one of the most influential right wingers involved in the Government's rethink on the future of the welfare state.
Ministers are looking for savings as the benefits bill has risen to pounds 80bn this year and is expected to go on rising by at least 2.6 per cent a year.
They are also planning how to cope with the 'demographic timebomb' whereby there will be five million more over state retirement age by 2030. Today's workers pay for today's pensioners through National Insurance contributions and now there are 3.5 people working for every pensioner. In 2030 there will be just two workers for each pensioner. By then the state pension, which is uprated in line with prices rather than earnings, will be worth about 8 per cent of average earnings.
Mr Willetts's idea for pensioners to live off capital is part of a six-point plan to cut costs and target benefits on people in most need. The plan was put forward at a conference last week on the future funding of the welfare state organised by the Centre for Policy Studies, a think tank founded by Lady Thatcher and Lord Joseph. Mr Willetts is a former director.
Mr Willetts, a member of the all-party social security select committee, has discussed the pension proposal with Peter Lilley, Secretary of State for Social Security, who is conducting a review of spending. Mr Lilley was 'receptive', he said.
Many of Mr Willetts's proposals are already known to be being considered by the Government.
His plan includes tightening the number of people eligible to claim invalidity benefits; requiring single parents to seek work once children reach school age; requiring people on unemployment benefit to sign on more often; giving local benefit offices more discretion to decide how much benefit a person needed; allowing people to buy extras such as pensions, services in hospitals such as private rooms or different food and videos.
The most original - and controversial - idea is for pensioners to sell their assets. Mr Willetts told the conference: 'The only way there could be an inheritance revolution - whereby large numbers of middle aged people suddenly found themselves inheriting assets when their parents die - is if the state has been providing for their parents in their later years. We should be dampening expectations of inheritance and their assets should be used to help provide an income in their old age.'
He told the Independent on Sunday: 'Most pensioners are asset rich and income poor. Many have paid off their mortgages. It should be possible to convert that asset into a flow of income. There needs to be a change of attitude so people see the purpose of saving is to care for themselves in their old age rather than leave a nest egg for their children.'
Such a policy would be a significant change in direction for the Tory party. The last election manifesto contained a commitment to reduce inheritance tax.
But the idea of pensioners having to convert assets to income is not without precedent. The benefits rules already state that when retired people go into nursing or residential homes, paid for by the Department of Social Security, the department can claw back money once the house is sold.
Age Concern is alarmed at Mr Willets's ideas. Sally Greengross, director, said: 'Many older people do not have sufficient assets to provide adequately for their retirement. About half of pensioner households are not owner-occupiers. Even among those who do own their own homes, recent research has concluded that the housing equity of older owners is of limited use for generating extra income in their own lifetime.
'Half of all pensioner households depend on state pensions and benefit for at least three quarters of their income. They are simply not in a position to use assets or their home to finance their retirement.'Reuse content