Ben Wilkinson: Means-Test the State Pension—Starting with the Public Sector

The debate around the future of the state pension resurfaced last week, sparked by remarks from Conservative leader Kemi Badenoch about the long-term affordability of the triple lock system. This controversial topic gained further momentum with Labour’s new pensions minister, Torsten Bell, stepping into the spotlight. Bell, known for advocating the abolition of the triple lock in his previous think tank role, described the rising state pension as “indefensible” in comparison to declining working-age benefits.

The discussion also turned to means-testing the state pension, with Labour expressing interest in adopting Australia’s model. Australia excludes the wealthiest retirees from accessing state-funded retirement benefits, potentially providing a framework for the UK to follow. However, while this debate rages, a critical issue continues to fly under the radar—the escalating cost of public sector pensions.

Rising Costs of State and Public Sector Pensions

Currently, the state pension supports nearly 13 million people at an annual cost of £137.5 billion. However, public sector pensions—granted to approximately three million retirees—cost taxpayers an additional £54 billion each year. This disparity in numbers highlights the significant financial strain public sector pensions place on the country, particularly as most recipients also qualify for the full state pension.

Public sector pensions offer significant advantages. For instance, civil service job adverts often boast employer pension contributions as high as 28.9%, far exceeding the 3% commonly seen in the private sector. These generous terms often include gold-plated, inflation-proof benefits, creating a stark contrast with the uncertain returns many private sector workers face.

For private sector employees, retirement security often depends on market performance, and employer contributions rarely match those of the public sector. This discrepancy adds to frustrations among private workers, particularly as changes to pension policies frequently erode their confidence in saving for the future.

The “Elephant in the Room”: Public Sector Pensions

The cost of public sector pensions is often referred to as the “elephant in the room.” Despite being a substantial financial burden on taxpayers, it rarely features prominently in political debates. Unlike state pensions, which are periodically scrutinized for potential cuts, public sector pensions remain largely untouched, protected by their beneficiaries’ proximity to policymaking circles.

Critics argue that these pensions should be limited to essential public servants, such as soldiers, nurses, and teachers—individuals who make sacrifices for the greater good. Extending such generous benefits to civil servants who only occasionally work in the office has been called indefensible by some commentators.

Means-Testing: Fairness or Betrayal?

While the triple lock ensures that state pensions keep pace with inflation, wages, or 2.5% (whichever is highest), questions about its sustainability persist. The suggestion of means-testing the state pension—removing or reducing payments for wealthier retirees—has gained traction among policymakers. However, this raises ethical concerns about penalizing those who have saved responsibly for retirement.

A means-tested system could be seen as a betrayal to millions who rely on the state pension as a vital part of their retirement income. Given that purchasing an inflation-linked annuity paying £11,500 annually on the open market would cost £250,000, the state pension remains a lifeline for many.

Critics argue that before tampering with the state pension, the government must address the “gravy train” of public sector pensions. Allowing such an expensive system to continue unchecked while imposing cuts on private savers would be seen as inequitable and unjust.

The Path Forward

The Treasury faces a harsh reality: the current system of final-salary, index-linked pensions is unsustainable. Any effort to reform pensions must ensure fairness across sectors and avoid penalizing those who have planned for their futures responsibly.

While the debate over the state pension’s future continues, one thing is clear—ignoring the mounting cost of public sector pensions is no longer an option. A balanced approach that considers both the state and public sector pension costs is essential to create a sustainable and equitable retirement system for all.