What can we learn about pensions from the Victorians?

David Kingman and Duncan Steadman explore the history of the state pension, and why increases in life expectancy mean that changes are necessary

Between 1906 and 1914, Prime Minister David Lloyd George and his colleagues in the Liberal Party passed a series of measures known as the “Liberal welfare reforms”, which put in place many parts of the welfare state that we are still familiar with today, including free school meals, labour exchanges (the precursor of modern job centres), national insurance, unemployment benefits, and a system of employee health insurance that laid much of the groundwork for the NHS.

However, arguably their most significant achievement was the establishment of the state pension scheme, which followed the passage of the Old Age and Pensions Act in 1908. This marked the first time that the government had guaranteed to provide a form of age-related income support for its citizens, although in practice this was very different from the state pension we still have today.

The state pension is now regarded as a “universal benefit”, meaning everyone is eligible to receive it (as long as they’ve made a sufficient number of National Insurance contributions during their working life). By contrast, the 1908 Old Age and Pensions Act was deliberately very limited in scope.

Pensions for the poor

Initially, in order to receive a state pension you had to be over the age of 70 and be earning less than thirty-one pounds and ten shillings a year. This was a very low threshold; it amounted to a weekly income of roughly 12 shillings, at a time when even a labourer could earn 30 shillings per week.

You also had to satisfy a dizzying list of other criteria in order to qualify: recipients had to pass a character test which included, having a history of employment, having been a British citizen for at least 20 years, being “of sound mind”, not be receiving poor relief, and  not having been in prison during the preceding decade or been convicted of drunkenness.

Even if you did qualify, the state pension was paid on a sliding scale which began at just five shillings a week for individuals, and seven shillings sixpence for married couples. This was set deliberately low intentionally, in order to encourage people to save for their own old age.

One of the most important aspects of the scheme was that the state pension age was set at 70, despite average life expectancy being just 51. Clearly, Lloyd George’s government only intended the state pension to provide an extremely limited scheme of assistance to the very poorest and longest-lived among the elderly. In this, they undoubtedly succeeded; an article printed in The Times on Thursday, January 13 1909 claimed that only 596,038 pensions had so far been granted, mostly to poor women.

When we compare the Victorian system with the one we have today, it’s worth enquiring how and why everything changed – and whether there are any lessons that could help us deal with our present pensions crisis.

Can we learn anything from the Victorians about pensions?

Since Lloyd George’s day there has clearly been a huge shift in the way we think about the state pension and what it is supposed to achieve.

The biggest change to how it works since 1908 has been that the age at which people qualify for the state pension has fallen, despite life expectancy continuing to rise. Nowadays, men can claim a state pension at 65 and women at 60 (although the government plans to steadily increase these ages), despite the fact that average life expectancy was 81 in 2010.

As a result, today’s state pension scheme is run on a totally different scale to when it first started. Over 10 million people now receive the state pension in the UK, and the government estimates there will be 19 million Britons over the age of 65 by 2050.

The ONS has predicted that 1 in 5 of today’s children will live to be 100, meaning that even allowing for an aggressive programme of increases in the retirement age, a vast cohort of people could still end up spending more than a quarter of their life in retirement.

The state pension is also now significantly more valuable than it was in Lloyd George’s day, so the enormous number of pensioners imposes huge costs upon the state. Part of the original design of the 1908 state pension scheme – which has been maintained – was that it should be “non-contributory” for individuals, so these costs always have to be met by the taxes of younger workers.

From the way that the state pension has evolved, it’s clear that it is now supposed to fulfil a much broader function than was the intention of the 1908 Act. Nowadays, almost everyone regards it as something akin to a human right to be given a state pension for the final 15–20 years of their life, and it is intended to provide them with a fairly significant income (compared to its generosity in 1908, at least).

The pensions pinch

The ageing population, and the rising number of people living in retirement, is likely to create significant challenges for the state pension scheme in its present form. Painful, unpopular reforms are likely to be needed at some point in the future, which potentially go beyond the relatively mild tinkering with retirement ages which has already been proposed.

Some other countries, mindful of the looming pensions “pinch”, have already taken bold steps towards reform – in Australia, for example, the basic state pension is already means-tested, and other countries are likely to explore this route as they find their financial struggles grow increasingly acute under the present model.

The state pension is a hugely important plank of the welfare state which enables many pensioners to live with dignity in retirement. It should not be chopped and changed arbitrarily.

Yet if changes become inevitable, it would be useful for people to have a better knowledge of what role the state pension is intended to perform, and where it comes from historically – including the fact that for a long period, it was means-tested.

As a nation, we don’t want to go back to a system which, by design, automatically condemns people to penury in their old age. Yet if people were more aware that the state pension has not always been as generous and reliable as it is at the moment, balanced and sensible reforms would surely be easier to achieve.

As a nation, perhaps this is what we need to learn from the Victorians.

Photograph of David Lloyd George reproduced under the terms of Wikimedia Commons.

Posted on: 13 October, 2012

7 thoughts on “What can we learn about pensions from the Victorians?

  1. Barry Pearson

    Here is the important question:

    Consider a 65 year old man (me, for example) who has made the required number (and more) of National Insurance contributions throughout his working life. His employer has also made corresponding payments.

    Suppose that money had instead been paid into a true individual fund, rather than the collective National Insurance Fund. So it would in effect be a private pension fund. What sort of private pension would that individual fund now buy, compared with the state pension? What are the relative rates of return?

    As far as I can tell, the rate of return for my state pension is poor compared with the rate of return for my private pension. I would have been better off now had I been able to opt-out of the National Insurance scheme, (or at least its pension component), and have an extra private pension instead. Part of the reason is that higher rate taxpayers got a poorer rate of return than lower rate taxpayers.

    We already do have means-tested pensions, of course – the Pension Credit. There is a massive “moral hazard” in means-testing state pensions: if you know you won’t get much state pension if you have a private pension, why bother to save for a private pension? Why not spend the money when you earn it, and just let the state (that is, younger generations) provide on retirement?

    For interest, the total amount of central government tax I pay (income tax, VAT, etc) exceeds my state pension. I am still a net contributor, despite having lost my job years ago and now being a basic rate taxpayer. So I am still helping to pay for both older and younger people. (Being child-free, that has pretty well always been the case).

  2. Barry Pearson

    I’ve looked at some simple cases to identify the pension rates. This may be spark further discussion in this thread. (I’ve chosen very simple cases).

    A highest rate taxpayer may get the basic state pension of about £107, and then be taxed at 50%. Hence they will receive about £54 per week.

    A person below the tax threshold may get the basic state pension of about £107, and not be taxed. Then perhaps get Pension Credit of up to £137. Hence they will receive about £244 per week.

    So the amount of pension received is massively means-related, from £54 to £244 per week depending on income.

    Disclaimer: I am not at either extreme! I am a basic rate taxpayer who doesn’t qualify for Pension Credit, so I am a bit more like the first case.

    And I am too old to qualify for the future increased flat rate for the state pension. That is for younger people than me.

  3. Paul

    The hard solution to the current financial generation gap is for the young to refuse to pay their taxes.
    The hijacking of the apparatus of state by the elderly generation has finally reached its critical point. Young people should refuse to support this system and bring it crashing down from above. If young people refuse to pay their taxes the bond market will realise that the ability of the government to repay its debt is non-existent. Quantitave Easing is merely a short term solution to the government’s problems – the bond market cannot be artificially propped up by the Bank of England forever. If the UK bond/gilt market is made to realise that current and future tax payers are not going to pay their taxes the entire system has to collapse.
    The baby boomer generation has broken their intergenerational contract with the youth. In all of history there has never been a transfer of wealth from the young to the old on this scale. And do you know what – you probably haven’t even started paying yet. But you’re going to – under the threat of imprisonment.
    The increase in value of the older generations housing has not appeared from thin air: have you ever wondered why your parents and grandparents house prices seem to keep rising? You may think that they played the market well? No they have not. What they have successfully achieved is passing the cost of their increased wealth onto you – their increased property value is your future debt. It’s the reason you will pay a huge mortgage for the same house that cost them 1/5 the price.
    In addition to the ‘housing bubble’ the older generation have left the young with a massive £7 trillion (yes that is right – £7 Trillion!) liability towards the old as they retire early on public sector pensions and free health care until death. This debt is entirely dependent on the taxation system and the government ability to appropriate your hard earned money to pass on to the old. I never voted for this system – did you? This unethical demand imposed on people before they are even allowed to vote is clearly immoral and cannot be allowed to continue. Socialism is now engrained to such an extent in the population that it is starting to destroy democracy as we know it.
    During the recession the young have suffered the most – we have the highest unemployment rate and are now expected to further increase our debt just in order to be educated and achieve some hope of obtaining employment. The older generation didn’t pay for their education – their parents understood their intergenerational contract and paid just as their parents did. The current baby boomer generation simply don’t care and have pulled up the ladder leaving the young to rot. The young are no longer represented in the country – almost all MP’s, senior bankers, media producers etc… are controlled by the baby boomer generation. I say no taxation without representation in this country. We should refuse to pay until the old stop living at our expense.
    The young should collapse the entire miserable debt pyramid that the older generation are imposing on us to fund their comfortable saga retirements. Refuse to pay your taxes and don’t be fooled into taking out a huge mortgage. Crash the market for them – the systems entire existence is based on the theory that you will pay your taxes. Refuse to pay. Do not be intimidated by the state.

  4. Barry Pearson

    A problem with that analysis is that it doesn’t say what the current older people actually did to cause the current situation! HOW did we (I’m 65) do the following? “What they have successfully achieved is passing the cost of their increased wealth onto you”.

    I never saw anything in a political manifesto that encouraged me to vote for a party offering that option. (Indeed, I have never lived in a ward or constituency where my vote has ever made the slightest difference to the final result!)

    99% of us never had our hands near the levers of power. We lived in a country where things happened that we didn’t understand (no WWW; no FOI) and that we couldn’t have done anything about anyway. We made exactly the same decisions that today’s younger people would have made in the same situation: get a job; spend some of the money; put some of it into pensions or savings; take out a mortgage; pay NI so that we were contributing to others and qualifying for our own state pensions.

    The political battles that I remember when I was younger were about who ran the country: the government or the unions. Later they were about public sector versus private sector. My own (useless) votes were in favour of good financial housekeeping and against the undermining of private pensions and against any hint of “borrowing our way out of trouble”.

    The fact that “the elderly” is a large group doesn’t automatically gain political favours. (The elderly don’t vote as a block). “Women” are an even larger group, but they don’t dominate the country!

    An important aspect of “the elderly”, or “pensioners”, is that everyone expects to be one of those eventually. For young people, they are your grandparents. For people a bit older they are your parents. For people a bit older, they are what you will soon be. There have always been advantages for younger people in having their elderly relatives looked after by the state, because it reduces the need to support them themselves.

    This is why there are votes in support for the elderly: the votes don’t all come from the current elderly (who are not consistent), but also from younger people who see their own future and have responsibilities for elderly relatives. How many pre-retirement people would vote for a worse life after retirement?

  5. Barry Pearson

    I’ll make a separate point which actually applies to a huge amount of the literature on intergenerational issues. (This is taken from the government statistics site).

    In the UK, there was a (smallish) “baby pop” from about 1946 to 1948, peaking in 1946. Then there a (huge) “baby boom” from about 1955 to 1974, peaking in 1965.

    In the UK, there was not a “baby boom from 1945 to 1965” or anything resembling that. 1950 was a trough, not part of a boom. 1965 was a peak, not an end.

    The ages of the true baby boomers range from about 38 to 57.

  6. Tom

    “Suppose that money had instead been paid into a true individual fund, rather than the collective National Insurance Fund. So it would in effect be a private pension fund. What sort of private pension would that individual fund now buy, compared with the state pension? What are the relative rates of return?

    As far as I can tell, the rate of return for my state pension is poor compared with the rate of return for my private pension. I would have been better off now had I been able to opt-out of the National Insurance scheme, (or at least its pension component), and have an extra private pension instead. Part of the reason is that higher rate taxpayers got a poorer rate of return than lower rate taxpayers.”

    Barry, maybe I misunderstand, but your insight here seems to be that you – as a wealthy person – would be even wealthier if you didn’t have to worry about what quality of life those poorer than you have, and contributed less (financially, via the tax system) to the country in which you live.

    “We already do have means-tested pensions, of course – the Pension Credit. There is a massive “moral hazard” in means-testing state pensions: if you know you won’t get much state pension if you have a private pension, why bother to save for a private pension? Why not spend the money when you earn it, and just let the state (that is, younger generations) provide on retirement?”

    I agree there is a moral hazard, but I disagree that it’s to do with means-testing based on income. It is absolutely right to means-test individuals based on income, because the problem is not on an individual basis it is on an intergenerational basis. If anything, the pensions should be means-tested for a whole cohort based on their net contributions (offset against things like the national debt and environmental damage…), and then means-tested within that. (We use the term cohort to try to avoid confusion, describing groups of people as they pass through the generations. These problems in their current incarnation aren’t necessarily young-vs-old, they’re more born-in-one-decade-vs-born-in-a-different-decade).

  7. Barry Pearson

    Tom: you said “Barry, maybe I misunderstand, but your insight here seems to be that you – as a wealthy person – would be even wealthier if you didn’t have to worry about what quality of life those poorer than you have, and contributed less (financially, via the tax system) to the country in which you live.”

    I am not a wealthy person. I am a basic rate taxpayer. I lost my job before I was expecting to retire, and lost a lot of sleep worrying about whether I would have to sell my house. Until recently when I became 65, I lived just on my private sector pension and my life savings because I wasn’t entitled to means-tested benefits.

    I was born into austerity like most people in the “baby pop” from about 1946 to 1949. (I wasn’t born in the non-austere real baby boom from about 1955 to 1974). I lived with my parents in a council flat on a council house in Birmingham until I had finished university. (My mother had to work to help pay for my education). When I moved out, my parents could for the first time think about buying a house of their own. Obviously I had no inherited wealth whatsoever!

    Once working, I was a child-free workaholic, which enabled me to become a high-rate taxpayer and save towards a private sector pension and life savings intending never to rely on the welfare state. My plans went wrong when I lost my job, but I still pay more to central government than I receive as a state pension.

    The point I was making is that I contributed to society via taxation and NI, and never claimed from society for children, or for out-of-work benefits even after I lost my job. Having been a child-free workaholic helped me become a bit resilient to life’s many ups and downs. So more than 4 decades of paying tax and NI means I am entitled to a state pension, and having made mortgage payments for nearly 4 decades means that I am entitled to my house. (Soon I will make the final mortgage payment and for the first time in my life I will own a house outright).

    If people are means-tested on their state pension as a result of their private pension, why save for a private pension? If they are means tested as a result of their life savings, why save? Why shouldn’t I be better off from being a child-free workaholic than someone who had children or didn’t work as hard? (Needless to say, I pay tax on my state pension).

    I realise that envy may cause some people to want to change the rules so that after more than 4 decades of contributing I get much less than I was told I was entitled to. But that is exactly the wrong message to send out to society: “Don’t bother to try to pay all your contributions and save for a private pension and save for your old age. The government will change the rules and take it off you. Spend it while you are young, so that the state (meaning other taxpayers, especially younger people) will look after you when you are old”.

    It is clear that the government knows society cannot manage that way. They are trying to find how to encourage people to save for pensions and in other ways. It is vitally important for it to be seen that hard work pays, because society needs people to work hard.

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