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Conservatives predict £100bn pensions black hole

By
Charlotte Denny
The Guardian, May 21, 2003

Spending on state pensions will blow a £100bn hole in the Budget by 2050, the Conservative party claimed last night, as it accused the government of "massively understating" the true cost.

The government will be forced to pick up the tab for the collapse in private pensions, which will load extra costs on to its new means-tested regime, according to David Willetts, shadow secretary for work and benefits.

"I estimate that expenditure on benefits for older people could well double to 10% of GDP by 2050, a £100bn increase in today's money," said Mr Willetts. "These figures show that means testing benefits does not save money in the long term. It makes state spending on pensions even more sensitive to the collapse of funded pension savings."

While other European countries are expecting the share of national income spent on pensioners to rise sharply, government projections show spending in Britain remaining stable at around 5% of GDP.

But the Conservatives claim that the government figures exclude some benefits and assume that pensioners' incomes from their own savings will continue to rise in line with average earnings.

Mr Willetts says a typical with-profits personal pension will deliver an income three quarters of what it would have been six years ago, while annuity costs have increased by a half. The combination means that the typical pensioner is retiring on an income half what they could have expected in 1997.

"All of this adds up to a grim picture," Mr Willetts told the Institute of Economic Affairs, yesterday. "Funded pensions, a great British success story, are now in headlong retreat."

With fewer workers able to save sufficient funds for their retirement to lift them above the threshold for qualifying for means-tested additions to their pensions, the government faces a larger than anticipated bill.

However, independent experts at the Institute for Fiscal Studies queried Mr Willett's sums. "Based on existing policies its hard to see pensions costing an extra £100bn," said policy analyst Carl Emerson. "The UK doesn't have a financing problem, but it does have a political problem. The real question is how much of pensioners income do we think the state should be providing?"


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