Frank Field: We can put up taxes if it means the people benefiting

It's time to embrace the biggest pension change since Beveridge

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The new politics of the recession – and more importantly its long aftermath – begins on Wednesday when the Chancellor opens his Budget. Its centrepiece will be a statement that Britain will attempt to borrow more money as a proportion of GDP than any other G7 country. The new politics is about convincing the money-lenders that we are a safe haven, and to do that successfully requires the Chancellor showing that this Government has plans to set in order the wild chaos now apparent in the national accounts.

The Independent has set out the iron framework within which the new politics will operate with Hamish McRae summarising the position with a cruel brevity. No government has been successful in sustaining its tax take above 37 per cent of GDP. Governments like to please taxpayers by spending up to 50 per cent of GDP.

We are now in the age of tax increases and public expenditure cuts. It is going to be very difficult to raise substantial sums of new money for the reason McRae has given. It would certainly be worth the Government abolishing the higher rate concession for pension contributions. This would bring in £5bn. To phase it out all together would raise £18.9bn.

So how can the centre-left regain its radicalism when new money is going to be very scarce and existing programmes cut back? Part of the answer is to spend existing budgets differently and better. Part of the answer is also the striking up of a new relationship with taxpayers so that they increase their contributions to programmes which have a direct interest to them.

Now more than ever is the time for a radical government to embrace the biggest pension change since Beveridge. Here is how such a reform would work.

The present Government is committed over the coming decades to raise spending on state pensions, from 6.2 up to 8 per cent of national income. This may sound a modest amount. But such a change would require a 5.5p increase in the standard rate of tax. Yet this reform will leave four in 10 pensioners in poverty. Worse still, the growing burden of public sector pensions is set to get even worse. So how might existing budgets be better spent?

The Government has blocked work I have developed with the Pension Reform Group to offer a guaranteed Universal Protected Pension that will abolish pensioner poverty. The reform would build up an investment fund to run alongside the current state pay-as-you-go scheme.

Those who are poor, and good citizens, would have their contributions paid for by other members. So the scheme has an important element of redistribution. In return all members get what is almost impossible for them to buy independently – a guaranteed retirement income above means testing. The scheme would "swallow" the current pay as you go scheme and the investment side would guarantee this minimum pension.

We would have to be mad to trust any Government with our savings. So the new universal pension would be kept at arm's length from the state. Its independence would be guaranteed by a double locking safeguard.

The scheme's trustees would need to be appointed and housed, say, at the Bank of England, with the Governor as chairman. A 75 per cent Parliamentary majority would be needed to change the scheme's governance.

Implementing such a reform puts abolishing poverty as the central objective. It builds again a direct link between contributions and benefits – you pay for what you get. Genuine pension reform would cost more money, but this cost would be staged over time and the new money would be used by members to build up their own collective fund.

This reform also offers a civilised way of capping the cost of public sector pensions. Big reform here wouldn't then be seen as a mad axing exercise, but as part of the redrawing of what the state can do for every worker – by guaranteeing a national minimum – and what it cannot do any longer.

Once the UPP was in place all public sector schemes, including that for MPs, could be closed to all new members. In return, the UPP would offer a guarantee to all new public and private sector workers of a minimum pension that would take the holder off means testing. They could then save without any means-tested claw back.

Building up a guaranteed pension would help to bring the national accounts into balance. The current £15.5bn welfare bill for pensioners would bet set on an elimination path. Likewise the cost of public sector pensions should be reduced. But the biggest prize, of course, would be a government programme with the explicit goal of simply abolishing pensioner poverty.

Frank Field, Labour MP for Birkenhead, blogs at www.frankfield.co.uk

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