Does means-testing pensioners make financial sense?

This article has now been updated (please see below).

Debating the issue of pensioner benefits in a 10 minute interview on Radio 4's Today programme, Mark Reckless MP chose to quote one startling statistic: the government spends £19 billion per year on its membership of the EU.

What, you may ask, does this have to do with the cost of pensioner benefits? This is a good question. Arguably, Britain's contribution to the EU is of very little relevance. It is, however, part of a broader discussion about how the government will repair the public finances and prioritise different areas of spending.

In recent days, the idea of means-testing pensioners during the next parliament has been resuscitated. But Mr Reckless argues that the elderly deserve to be protected from an "intrusive and impractical" policy. During his interview with John Humphrys, he claimed that the administration costs of a means-test would be "enormous" and "far, far greater than anything that would be raised".

Could means-testing pensioner benefits help plug the deficit?

Universal pensioner benefits include (but are not limited to) the Winter Fuel Allowance, complimentary bus travel and free TV licences. The Winter Fuel Allowance is expected to cost the government some £2.2 billion in 2011/12, free bus travel is estimated at just under £1.1 billion (although disabled adults also qualify for the benefit) and free TV licences for the over 75s at around £578 million. 

Various thinktanks have estimated how much money the government would save if it abandoned the principle of universal benefits for the elderly. The Institute for Fiscal Studies (IFS) has calculated that the government would be £1.4 billion richer if it restricted the Winter Fuel Allowance and free TV licences to those on Pension Credit (which is means-tested). And while it's unlikely that the costs of administering the reform would spiral to £1.4 billion, there's no estimate on what the final saving would actually be.

So, what are the administration costs?

First of all, nobody had a clue. Back in 2010 Conservative MP Maria Miller admitted, "The estimated cost of adopting means testing for all benefits is not available and could be obtained only at disproportionate cost".

Earlier this year, the Public Accounts Committee criticised the lack of data in this regard: "There remains little confidence in departments' estimates of the unit costs of administering claims, although DWP has made some progress in identifying the factors that affect costs. Without understanding the costs and benefits of different forms of means testing it is difficult for departments to establish whether they are achieving value for money."

Then Conservative MP Ben Gummer asked Steve Webb, the Minister for Pensions, how much it would cost to means-test the Winter Fuel Allowance alone. Whilst Mr Webb couldn't produce any exact figures on the cost of administrating the policy shift, he concluded: "Means-testing winter fuel payments would significantly increase administrative costs, but it is likely that these would be more than offset by decreased benefit expenditure".

So we contacted Mr Reckless to ask how he calculated that the Treasury would lose out if the government decided to means-test pensioner benefits, as he seemed to be contradicting his own party's government. Despite our best efforts, we've had no response. So we're still none the wiser as to how the MP arrived at the conclusion that the reform would be a bureaucratic headache that would cost more than it would save. 

Has anybody done the maths?

First of all the government admitted that they didn't know how much means-testing pensioner benefits would cost. Then they said that the savings would probably be worth the administrative price tag. Now one of their own MPs has asserted the opposite. 

Until Mr Reckless has provided any data or research that he is privy to, as we have requested, we're short on evidence. In the meantime, we will be asking MPs to pose Parliamentary questions on our behalf. 

The passion of those contributing to this debate is obvious; their evidence, however, remains obscure.

UPDATE (27 September 2012)

In response to our enquiry, Mr Reckless has now made clear that he was referring specifically to a new Liberal Democrat proposal to means-test those pensioners with assets over £1 million. The article above refers to the other proposal discussed during the Today programme interview - that of means-testing all pensioner benefits.

Mr Reckless explained: "Since government does not know people's wealth it would require new and very substantial information collation and processing to implement that [policy], in order to withdraw benefits worth only a few hundred pounds annually from only a small proportion of pensioner households".

The live Today Programme interview involved a fluid discussion of both the new Liberal Democrat suggestion and the principle of universal means-testing for pensioners, and it wasn't clear that Mr Reckless's remarks referred specifically to the Liberal Democrats' million pound threshold. We are grateful to him for clarifying.

We look forward to establishing what data exists on how much it would cost to means-test all pensioner benefits.

Flickr image courtesy of daoro