Steve Webb’s response: cuts to pension deferral will pay for higher state pension

One of the many joys of Twitter is that it's possible to engage in conversation with just about anyone who's on the social network - whether you know them or not. Last night, after tweeting my blog to the pensions minister Steve Webb, I found myself engaged in a mini-debate with him while I was brushing my teeth.

In my blog yesterday, I explained how the deal for people who decide to carry on working, and take their state pension later in life, is about to get much worse. Currently, if you delay taking your state pension, you can get an extra 10.4% added on for each year that you wait. But from 2016 this is going to be chopped to 5.8%. The difference will be that while you are currently rewarded for carrying on working, in the new regime there is a high likelihood that you will end up with less state pension in your lifetime.

Protesting too much?

Mr Webb took exception to my use of the phrase "smash and grab" - claiming that the £300m or so which the Treasury will gain from these changes will be used to pay for the higher flat rate state pension, which will also be introduced in 2016. But this is the first time that I've seen him make this association.

Much of the savings needed to pay for a higher flat rate state pension will come from the phasing out of the State Second Pension (or Serps as it used to known), and from the removal of the need to means-test as many people.

In previous interviews where Mr Webb has talked about cuts to the deferral rate, he has not talked about it as being a necessary saving to pay for the flat rate state pension. More often, he has voiced his conceptual dislike of the current arrangements - claiming that there is no evidence that it is an effective way of encouraging people into work.

Cuts must come hand in hand with transparency

I can see that the current bonus is very generous - and a cut in these austere times may well be appropriate. But halving the rate will actually mean that people could be worse off if they defer. This hardly seems fair - especially if they are continuing to work, and generate additional taxes and national insurance for the government. Would it not have been fairer to limit the deferral option to people who stay in work - as they are effectively paying for their top up through their employer's national insurance contributions?

I'd love to see the sums behind Mr Webb's complex set of pension reforms laid out in the open. My guess is that the whole package will provide overall savings to the government - and will not be entirely cost-neutral as Mr Webb claims it will be. I've not got a problem with that - our pensions system will be unsustainable if the right reforms are not made. But it would be good to see the government being upfront about where the winners and losers will be - and a little bit clearer about why it is settling for the solution it has chosen.