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Posted on December 13 2013
Chapter 4 of the Scottish Government’s Independence White Paper deals with health, wellbeing and social protection. This includes policy on pensions, social security benefits, housing, NHS and other health matters. This blog will focus on pensions and social security benefits. In common with other chapters of the White Paper, chapter 4 performs two functions. First, it explains the inevitable consequences of independence. Second, it explains the policies that the SNP would follow if elected to govern an independent Scotland.
The White Paper offers a different approach from that of the current UK Government which is criticised as increasing poverty and inequality. Independence will it is claimed provide the opportunity to create a fairer, more equal society, built around the needs of citizens
The key proposals on pensions, social security are (i) specific proposals for pensions (ii) a long term vision for the system of social protection and (iii) a statement of immediate priorities for action. I will discuss each in turn.
The SNP’s long-term vision proposes an approach based on the idea – borrowed from the Nordic countries - that welfare is a "social investment":
“… an investment across a person's life that is designed at all stages to promote equality, fairness and social cohesion.
A social investment approach starts from the premise that the delivery of welfare services should not be seen as simply a safety net for individuals who cannot support themselves. Instead they should be seen as an opportunity for positive investment in people throughout their lives. Social investments are designed to produce specific returns, such as learning and development in early years, employment and health gains in adult life, and for older people, increased independence and ability to be active in their communities. This investment is repaid through better outcomes for people, families and communities, and through increased contributions to society, whether that is through taxation or other means.” (pp. 160-161)
Following from that the White Paper states that in the long term welfare reform in Scotland, will built be on the following principles:
These are aims which are likely to be attractive to those of a social democratic disposition, but less so to those who think the role of the state in society should shrink. The philosophy of social protection presented is clearly very different from that of the UK coalition government. The latter’s aims have included achieving substantial reductions in public expenditure which given the political guarantee it made to protect health service spending inevitably means new restrictions on eligibility and on rates of benefit. The Chancellor’s autumn statement confirms the intention to cut the welfare spending bill further.
Apart from changes to current benefit rules and rates, the coalition has already embarked on a major restructuring of the system, notably the replacement of six existing means-tested benefits and tax credits by universal credit by 2017 (for details, see, my earlier post). The SNP rejects key elements of both the planned changes and those already implemented. Ironically, the stance the SNP has taken on this issue coupled with policy differences that have emerged since devolution in school education and National Health Service policy means that it can now be regarded as the principal defender of the post-war (WWII) consensus model of the welfare state. None of the UK parties adhere to as much of the post-war settlement as it does.
The White Paper begins by noting that the people and infrastructure needed to manage and to pay pensions in an independent Scotland are already in place in the form of the Pensions Centres operate by the Department for Work and Pensions and the Scottish Public Pensions Agency and local authority teams which currently manage Scottish public sector pensions. It notes also that Scotland – in common with other western countries - faces the long-term demographic challenge of an ageing population but that a particular challenge Scotland faces is a lower projected growth in the working age population compared to other countries and the rest of the UK. Scotland must, therefore, grow its working age population in line with the projected increase in those dependent on it i.e. pensioners and those under 16.
The general principle suggested is to keep the best of the current State Pensions system, while making improvements where it is sensible to do so. This will mean:
The Scottish Government states that if the SNP forms the government of an independent Scotland, its priorities will be to:
State Pension Age
The State Pension Age (SPA) for women across the UK is being increased from 60 to 65 between 2010 and 2018, and an increase to 66 for both men and women is intended to be fully implemented by October 2020. A further phased increase to 67 between 2026 and 2028 is planned. Whilst the SNP would accept that SPA would rise to 66 under the existing timetable, it is reluctant to endorse the rise to 67 between 2026 and 2028. Instead, it proposes to establish an Independent Commission on the SPA to consider the appropriate rate of increase of the SPA in Scotland over the long term. The commission would report to the Parliament within the first two years of independence with implementation shortly thereafter. (pp. 140-141)
The problem of the aging population is discussed in terms of dependency ratios, i.e. the ratio of persons not of working age to those who are of working age. The white paper distinguishes between two different ratios: the 'pensioner dependency ratio' and the overall dependency ratio. The 'pensioner dependency ratio' compares the population of working age people in Scotland with the population of state pension age. That ratio is projected to be higher for Scotland than for the UK as a whole over the next 20 years, i.e. Scotland will have proportionately more pensioners relative to the working age population. By contrast, the overall dependency ratio which compares the numbers of people of working age against the number of all dependents (both those of pensionable age and children) is projected to be lower than that for the UK as a whole over the same period. The Scottish Government argues that whichever dependency ratio is used, the key issue relative to the rest of the UK is the lower projected growth in the working age population in Scotland (four per cent compared with 12 per cent), not higher growth in the pensioner population.
The solution is not, however, to be found within the boundaries of pensions policy. Rather, the solution ‘must be to grow our working-age population in line with the projected increase in those dependent on it ...’ It is said that independence will allow Scotland to address population growth by ‘creating new opportunities for young people to build their careers and families within Scotland; action to attract people back to Scotland; and steps to encourage skilled migrants to move to Scotland.’ What this boils down to is, therefore, increasing immigration and reducing emigration. (pp. 145-146)
Occupational and personal pension rights and accrued benefits will not be affected by Scotland becoming independent and the structure and activities of the regulatory framework in an independent Scotland – under a new Scottish Pensions Regulator - would be closely aligned with that in the rest of the UK.
The cost and affordability of public sector pensions has been controversial in recent years. The Scottish Government is ‘fully committed to providing a fair, affordable and sustainable pension and reward package to public sector employees.’ (p. 149) It is said that in an independent Scotland, all public service pension rights and entitlements which have been accrued for fully or executively devolved or reserved schemes will be fully protected and accessible and there will be no difference to how much people pay for their pensions or the level of benefits they receive as a result of the move to independence. This does not mean there will be no changes. However, in an independent Scotland, the approach to negotiations about any future changes to public sector pensions ‘will be positive and inclusive, rather than confrontational. ‘
As noted above, the Scottish Government has stated that it will establish an independent commission to review and make recommendations on the SPA. The Scottish Government will then review the impact of its recommendations on public servants. This Government is also committed to reviewing the pension terms of all "uniformed" services, including whether or not they should all have access to their occupational pension at a consistent age or whether this should better reflect the role they carry out and the physical impact of their service. So, pension contributions and benefits may be reviewed but no indication is given of how.
This White Paper certainly presents a coherent plan for the future of pensions in an independent Scotland. I will not try to present a detailed economic evaluation, merely comment that the most important economic and political issue, of the many that the White Paper raises, is how pensions will be financed in future. The SNP’s solution to the problem of the adverse demographic trend is to change the demography rather then to change pensions. More young people will be motivated to stay in Scotland and more people of working age will migrate to Scotland. This is a bold prediction and it will be clear that if the balance between those of working age and dependents cannot be substantially altered that a future Scottish government would have to revisit questions of pension contributions, pension entitlements and retirement age.
The immediate priorities for action all raise interesting questions. All might be described as crowd pleasers at least for those on the left and centre of Scottish politics. They involve reversing or stopping the implementation of certain key policies of the coalition government which have proved controversial not just in Scotland but across the UK.
On benefits generally, the immediate priorities for action are (pp. 158-159):
The Scottish Government estimates that abolition of the "bedroom tax" will save 82,500 households in Scotland - including 63,500 households with a disabled adult and 15,500 households with children - an average of £50 per month. The cost of around £50 million per annum is estimated to be “less than the overall harm it does directly to the Scottish economy (£50 million per annum plus one-off losses of £29 million).” (p. 158).
The so-called “bedroom tax” illustrates nicely the sometimes problematic interface between reserved and devolved matters under current constitutional arrangements. In fact, the measure referred to is a limitation on the amount of housing benefit (HB) that may be claimed. Normally, the full amount of rent is eligible for inclusion in an HB claim. However, regulations which took effect in April 2013 provided that the amount of rent eligible could be reduced for under-occupation as defined in the regulations. The Scottish Government has estimated that as at May 2013 around 82,000 households in Scotland had been affected by the change and it had cost them an average of £50 a month. (COSLA/Scottish Government (2013) Updated Evidence on the Number of Households affected by the Housing Benefit Under Occupation Penalty)
The HB changes have also contributed to a substantial rise in rent arrears in the social rented sector.
The main driver for the change was the coalition’s desire to reduce public expenditure in order to cut the budget deficit. After the initial announcement, however, it was suggested that part of the rationale for the change was better use of the housing stock, i.e. it would free-up accommodation in the social rented sector that was being under-occupied by encouraging tenants to downsize in order to make more available for families currently without adequate accommodation. Insofar as the rationale for the measure was to cut the deficit, the argument applies equally across the UK. However, if the alternative rationale were to be taken seriously, that would mean that the new HB regulations which operate at UK level were addressing a problem of housing supply affecting England (particularly the South-East) and promoting an English housing policy goal. The patterns of housing including in the social rented sector are different in Scotland, perceptions of problems of housing supply are different and the Scottish Government has no equivalent policy goal.
Another area in which projected changes will affect reserved policy is the introduction of universal credit which the Scottish Government says it would halt. The Scottish Government is against it in principle, but this is also a measure with major housing policy implications. Housing benefit will disappear as a separate benefit. One consequence of that is that direct payment of housing benefit to landlords will cease and tenants will be forced to make rent payments themselves out of their income. This is predicted to lead to an increase in rent arrears.
Beyond that, the level at which benefits will be paid under universal credit means that a higher proportion of tenants in the social rented sector will be benefit claimants and this inevitably has consequences for social landlords. Also annual increases in benefits will be pegged to the consumer price index, whereas rent inflation tends to be closer to CPI. Taking together the likely higher levels of benefit dependency amongst tenants, the measure chosen for up-rating and the penalties already introduced for under-occupation, it seems clear that social landlords will be exposed to a higher level of risk. They will find rent-setting trickier. In the past, they could assume that HB would ‘take the strain’ of rent increases so that they did not adversely affect poorer tenants. That will no longer be true so affordability will become much more of an issue.
That changes in devolved areas of policy will have important impact on devolved areas is inevitable in any system of devolved government. Those who consider a devolved system of government preferable to either independence or centralisation must accept that as part of the price of devolution. For those wish to make policy development in areas such as housing more autonomous, independence provides the most obvious means but others are available. The full fiscal autonomy option favoured by some would do the same. It is an interesting question whether it would be possible to give Scottish housing policy more autonomy without such drastic constitutional change. Devolving the whole of benefit policy but not any other major policy areas would make little sense; devolving benefits would only make sense as part of the full fiscal autonomy option. However, it would in principle, be possible to hive off housing support as a discrete item of welfare spending and make that a devolved matter, leaving the rest of welfare benefit policy at UK level.
However, this option too might be effectively ruled out by the current direction of policy travel. If universal credit goes ahead in its current form, HB will cease to exist and housing support will be rolled up into the universal credit single payment. If the vote in the referendum goes against independence and a future UK government maintains the broad thrust of current reform plans, it is hard to see much scope for devolution of welfare policy or any way of insulating Scottish housing policy from the effects of changes in UK benefit policy.
Tom Mullen is a Professor of Law at the University of Glasgow