Why the Right is going for the big idea

THE PENSIONS REVOLUTION
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The Independent Online
Why is the Government reforming the state pension system?

The number of people of pensionable age will rise from 8.9 million in 1991 to an anticipated 13.5 million by 2030. Also, there will be a falling proportion of people in work to support them.

How are pensions affected?

The existing state pension scheme, funded by National Insurance Contributions (NICs), is a pay-as-you-go system. We pay for those who are already retired. In turn, we hope our pensions will be met by future NICs. If fewer people are in work, it costs more to fund pensions.

What is the Government doing?

In practice, the real value of state pensions has been cut over the past 15 years, mainly by linking benefits to inflation rather than earnings, which rise faster.

The state pension is worth about 15 per cent of the average wage and falling fast. Many people hope to make up the rest with company pensions or private pensions.

What is the latest change?

Peter Lilley, Social Security Minister, is proposing the Government abolish Serps, the state earnings-related scheme, and pay 5 per cent of NICs into people's personal pensions instead. In practice, the Government has already been doing this. Fewer than six million people are still in Serps: 15 million have opted out, thanks to extra NIC rebates paid to those who do. Many of those not in Serps are in company schemes. He also wants to scrap the basic state pension, replacing it with a guaranteed pounds 9 a week - again, paid into a personal pension. He hopes to cut the state's pension bill by pounds 40bn by 2040, while guaranteeing the same inflation-adjusted levels of benefits as today.

Will I be affected?

Probably not, if you are already a taxpayer. The proposals would be introduced at the end of the next Parliament. People in their late 20s onwards would continue as now. Those affected are today's teenagers, who would come under the new regime in the next five years.

Are there any problems with this?

The DSS admits the cost of the changes will rise by pounds 160m a year, reaching pounds 7bn by 2040. It hopes the extra bill will be paid by better economic performance. But if something goes wrong, today's taxpayers will end up paying for those already retired, for their own retirement, plus the retirement of those younger than themselves.

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