PTL Blog

NIIT (National Insurance Income Tax) back-door means-testing?

Posted by Colin Richardson on Sep 3, 2015, 3:19:00 PM

ponzi            Ponzi?

The announcement of a review into the merging of National Insurance and Income Tax into NIIT was slipped in just before the summer holiday period to less headlines than its cousin: the review of up-front pensions tax relief. But whether deliberate or not, may it be very significant as a first step towards future means-testing of state pensions?

Let’s be clear, the State Pension is a Ponzi Scheme with fewer contributions supporting an ever increasing volume of pensions. The recent move to a flat-rate basic state pension for all was bold but the 50 year costings looked rather “hopeful” in a level projection of share of GDP.

For sure, the tax review announcement is at this stage all about tax simplification and, indeed, there may be simplification benefits. With a blank sheet of paper who would have two types of taxes based on incomes? The National Insurance contributions are not hypothecated into a “fund” to pay the state benefits it has notionally covered since 1911. We all know it goes with all taxes into the Treasury to pay for everything.

However, separate National Insurance has served one purpose: it has made it harder to means-test the State Pension. It has made people feel they have paid for state protection.

Many social security benefits are targeted by their nature but the Basic State Pension has been largely universal, as have most aspects of NHS health services. To have a proportion of National Insurance contributors (those paying the most) receive nil benefits has been deemed untenable: the principle being that everyone has a stake in the system.

If we get NIIT, the idea of us all paying contributions for the security of State benefits disappears (even if in reality it is fictitious in any event). It makes means-testing easier.

Given that the State Pension changes announced in January 2013 were clearly unaffordable on the day they were announced (in the eyes of this author, anyway), how long till it happens? The idea that a substantially increased elderly population could be paid a higher and universal flat-rate pension, increasing each year by a mathematically flawed triple-lock formula given the starting point of a record national debt and fiscal deficit was as implausible as possible to be. Unless, that is, the State Pension Age rises so far that half of the population never get to receive it.   I notice that as time passes the reality of this non-affordability is becoming more widely acknowledged in official circles.

There are substantial arguments in favour of a flat-rate State Pension and against means-testing. Means-testing has all kinds of associated problems. It chimes very badly with auto-enrolment if members with small funds lose means tested State benefits. Hitherto, the counter argument has been that a universal pension does not target resources where most needed. Demographic trends add a further substantial argument against the new system: it is a giant unaffordable Ponzi scheme which as currently constituted cannot be sustained in the long term.

Of course the elderly are a potent electoral force so the political position is complex! The truth is not advertised.

So to get back to NIIT: the review is being conducted by the Office of Tax Simplification. It is a second such review. The name of the review body suggests the conclusion before it starts. Such a conclusion may be sensible. It could well lead in the medium-term to other changes too… Take the promise of a full State Pension with caution: it may not happen. Do you think you will receive the new flat-rate basic state pension, increased between now and payment by the triple-lock?

Topics: Defined Contribution

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