The Granny Tax: a little perspective, please

22nd Mar 2012

The reaction to the 'Granny Tax' is overblown, says Gordon Hector.

Reading the papers this morning, you would think it’s doomsday for older people - hit by a savage, cynical Granny Tax. I’m not sure. I think we’re losing perspective on phasing out the Age-Related Allowances (ARAs). Here’s why.

First, set it in the wider context of Coalition policy. They returned the earnings link for pensions. They introduced the ‘triple lock’ meaning it rises by earnings, prices, or 2.5%, whichever is highest. This Budget confirmed the state pension will be going up by 5.3%. Auto-enrolment is on the way. Pensioners were one of the big winners in the past 15 years – seeing a significant and sustained drop in poverty rates (PDF - see page 28) - and despite arguments about the effect of quantitative easing, unsurprisingly, this Government doesn’t want to challenge that progress. 

Second, look at the policy on its own merits. The reason it raises so much, and the reason it’s possible to describe it as a ‘multi-billion raid on pensioners’ is simply because there are huge numbers of older people - not because an entire generation is being pushed into penury. Poorer pensioners earning less than the allowance (£10,500-10,650 depending on age) won’t be affected. Nor will richer ones, who already lose the allowance if they earn more (£24-29,000). So it’s a change that hits the middle: an average of £84 this year, and £197 next (according to the Treasury). Obviously not good for them, and if you’re just over the threshold it will mean proportionally more. But hardly the apocalyptic tax that’s been described in the papers.

Third, it’s been reported as though this is a seismic shift in politicians’ treatment of older people. It isn’t. I think the reaction is overblown, and largely due to the fact it was the only Budget measure that wasn’t leaked. Changing the age-related allowance is not the slaughtering of some sacred cow.

In fact, maybe that’s the real criticism. Our rapidly ageing society prompts a fundamental question: how on earth do we support people in a way that’s fair, without bankrupting individuals or the state? If this Budget was really tackling the difficult issues about ageing, it would seek to answer that question, and establish a settlement for all generations. That could have involved plugging the funding gap in social care, for example - notable by its absence. Changing ARAs doesn’t meet those looming demographic challenges; this Budget, like previous ones, has ducked the bigger intergenerational issues.

I understand why people have reacted so strongly to the policy. But the reaction has largely been hyperbole. It’s a relatively modest move that hurts a bit. It’s not nothing. It’s also not the end of the world.