RELAXATION OF THE EARNINGS RULE

HC Deb 10 April 1974 vol 872 cc525-38

Sir B. Rhys Williams

I beg to move Amendment No. 3, in page 4, line 7, leave out '£13' and insert '£90'.

The Deputy Chairman

With this amendment we are to discuss new Clause 1 (Repeal of the earnings rule)—and Amendment No. 12, new Schedule (Amendments consequential on repeal of earnings rule). Both stand in the name of the hon. Member for Kensington and Chelsea (Sir B. Rhys Williams).

Sir B. Rhys Williams

Once again I shall try to be as brief as possible in the circumstances in raising a subject that has often been raised in the House by hon. Members of all parties and that leaves all of us extremely unhappy. I am sure that that applies to hon. Mem- bers on the Government side as much as to Opposition Members.

The object of each of my amendments is in effect the same, but I tabled the one I have moved which raises the point of application of the earnings rule from £13 to £90 a week partly for procedural reasons. I did not choose the figure of £90 simply out of the air; broadly speaking, in weekly terms it is the point at which a taxpayer runs into the higher rate of tax as a result of the changes proposed in the Budget, and, therefore, it is the next crossover point at which a new event takes place in the taxpayer's relationship with the Community. I thought that a reasonable resting place for the earnings rule for the time being.

For procedural reasons, I did not want to move the abandonment of Clause 4, to leave it out of the Bill altogether and to substitute new Clause 1, which abolishes the earnings rule, because we might have been stuck with the removal of Clause 4, which is a gesture in the right direction, and unable to secure the inclusion of the clause that I was proposing should take its place. The result of my efforts might have been to leave the situation as it is, instead of improving it slightly, which is what the Government are trying, commendably, to do.

If the earnings rule and its application are to be amended, it is proper that we should examine exactly what it is doing in our national insurance system, if we can. I believe that this is a blot on the national insurance system and, as far as I have been able to ascertain, one not found in, for instance, continental countries, which operate pension schemes on broadly similar lines to our own.

In France and Italy, I believe, most pensioners are exempt from any application of a rule of this kind. In Germany there is an earnings limit, but only for pensioners up to the age of 65. After that age the limit does not apply and those below the age of 65 are allowed earnings of 800 Deutschemark a month, which is double, or more, even the new rate, assuming that the Committee approves the Government's proposals.

Obviously, this feature is crying out for special consideration, and I think that the Committee should study it, even if only briefly, tonight. By what right do we insist that certain pensioners must lose their entitlement in certain circumstances? What is the basis of entitlement for the national insurance pension?

I have often asked whether it is need, contributions or citizenship. From the miserable statements that Ministers are put up to make by the Department, whatever party is in power, it is nothing to do with need, contributions or citizenship, but the retirement benefit has to be related to proof that the pensioner has in fact retired.

That rule—if it is the rule—seems to be shot to pieces in terms of actual practice. It defies social justice, because when a man has earned his pension by a life-long record of contributions, why should he lose his entitlement when he seeks to make a further contribution to society after he has reached the age of 65–60 for a woman—by continuing at work? It seems atrociously unfair, and I am sure that the vast majority of pensioners and, indeed, all members of the national insurance system, feel thoroughly uneasy and unhappy about it.

What seem anomalous is that the rule does not apply to men over 70. Why not? If what they have to do is prove that they have retired, why does the rule apply only to men of 65 to 70 and then lapse? I am not complaining that it lapses, but I point to it as an inexplicable anomaly. The same is true of women who continue to work after the age of 65. That is something which the Department cannot explain.

Mr. O'Malley

I understand the amendment which the hon. Gentleman is moving and I have looked at it carefully. The most useful thing I can do before the hon. Gentleman deploys the arguments, which he has put so well in the past—and he knows that I respect his knowledge and integrity in this matter—is to quote what my right hon. Friend the Secretary of State said in Standing Committee on the Social Security Bill on 27th February 1973 precisely about the abolition of the earnings rule: All of us stand back a little warily from total abolition at this stage, on no other principle than that of cost—which is really the only principle involved. We hesitate to pre-empt £100 million as a priority at this stage—or £115 million, as the hon. Gentleman said."—[OFFICIAL REPORT, Standing Committee E, 27th February 1973; col. 690.] The cost at the moment would be about £160 million, at a time when there is enormous competition for the deployment of public financial resources. I know the hon. Gentleman well enough to be able to say that I am sure that he will bear that in mind.

Sir B. Rhys Williams

I am grateful for the hon. Gentleman's attempt to be helpful. In fact I have before me the same quotation and I intended to come to it in due course. Perhaps I may throw back to the hon. Gentleman a very old saying, Honesty is the best policy ". Although that may have a rather cynical ring, I believe that it applies just as much to government as to business, and it applies particularly in national insurance because there is an alienating effect when the contributors and beneficiaries feel that they are not getting a fair deal. This is one of the points where beneficiaries of national insurance feel that they are not getting a fair deal.

I should like briefly to point to another of the anomalies that make the whole arrangement seem such a contrivance. The earnings rule does not apply to pensioners who have investment income. They may have as much investment income, I believe, as they like without incurring loss of their pension entitlement. It is only if they actually seek to contribute to society by working and earning that they lose it. This is especially bitter for someone who wishes to maintain a reasonable standard of living in retirement and has perhaps to compare himself with a neighbour who has income from investment, whereas he cannot catch up by working even if he tries.

Also, it applies only partially to those who have small earnings. The House has chiselled away at this anomaly, and, because hon. Members dislike it so much, Governments have had to recognise the feeling of hon. Members and have had to phase the application of the earnings rule instead of having a deadline. By accepting the necessity for phasing, they have accepted that there is no justification. Also, of course, there are special rules for the self-employed, which also points to the fact that there is no guiding principle behind this rule. The House is being asked by the Department and the Treasury to accept something inexplicable and wrong.

The hon. Gentleman quoted the speech by the right hon. Lady in Standing Committee. I well remember it because I too contributed to that debate. He did not quote her further remarks, which appeared in the same column of HANSARD and dealt with increments for deferment. One of the options open to a man or woman of pensionable age who wishes to contribute to his or her business, or to continue to earn, is to defer his or her retirement and to get the so-called actuarially-adjusted benefit a few years later. This is such a shaming fraud that when I tried last year to elicit from the Department the actuarial basis on which this figure was calculated. I received an evasive reply.

I now come to the quotation from the right hon. Lady. She said: The increments for the deferment of the time of retirement are a very bad deal for the pensioner. … It has been a fraud."—[OFFICIAL REPORT, Standing Committee E, 27th February 1973; c. 690.] Of course, anybody who examines it must agree with that. The pensioner does not really have the option, which is supposed to exist, of deferring the date of retirement, because if he does he simply loses benefit and gets only a fraudulent increase in exchange.

The hon. Gentleman tried to inform the Committee about the costs of acceding to the sort of proposal that I am now making. We hope to compare what he said with what was said by the then Under-Secretary of State, my hon. Friend the Member for Somerset, North (Mr. Dean): The cost to the National Insurance Fund, including the loss of contribution income, is estimated to be about £135 million a year. It is now a larger figure because of the higher benefit. My hon. Friend went on to say: The cost will arise mainly from paying pensions to over 200,000 people who, together with their wives, are not yet drawing pension because they still have regular and substantial earnings. Allowance is made for savings on sickness and unemployment benefit which would no longer be paid. On the basis that the pension would be taxed if paid in full on top of earnings the amount likely to be collected in income tax would be about £35 million."—[OFFICIAL REPORT, 22nd January 1974; Vol. 849, c 1437–38.]. I challenge that figure of 200,000 and I challenge the entire basis of the estimate on which that figure of £135 million, or now £160 million, was made. What other considerations ought to be taken into the calculations? For instance, what effects would it have on the conduct of pensioners who now make no effort to work if the earnings rule were totally abolished?

8.15 p.m.

If there are as many as 200,000 pensioners who would benefit, what about all the others? There are 1,220,000 men between 65 and 70 and 1,702,000 women between 60 and 65. That is a total of nearly 3 million. There are also people entitled to benefits under other aspects of national insurance where the earnings rule applies. Are we trying to convince ourselves that of 3 million people within five years of retirement age only 200,000 would seek to work if the earnings rule were abolished? It does not make sense.

What study have the Government made to ascertain the readiness to undertake work of all pensioners who do not undertake work at present? I put that down as a Parliamentary Question but received a reply on 8th April which showed that no study has been done at all. The Minister of State said that he would consider whether it might be useful to make such a study".—[OFFICIAL REPORT, 8th April 1974; Vol. 872, c. 45.] I cannot help wondering whether that parliamentary reply went through without the hon Gentleman having seen it, because the tone of the reply implies that he does not care very much. I know him well enough to know that that is not so. But it does not look well in print, as he is bound to admit.

Mr. O'Malley

The parliamentary reply to which the hon. Gentleman refers did not go through without my seeing it. I saw it and considered it very carefully. The hon. Gentleman will know that there was an inquiry into the subject from 1966 to 1967 and I thought it right that I should have time to look at the conclusions reached in that report and the general implications before deciding whether to use manpower to carry out another inquiry when one had already been carried out. I am not unsympathetic to the kind of research the hon. Gentleman mentioned. The more we know about this area, the more helpful it is in the formulation of any future Government policy.

Sir B. Rhys Williams

I am grateful for the hon. Gentleman's intervention, but there is still much more to be studied which perhaps does not fall within the ambit of his Department.

I tabled a Question to the Treasury and asked what proportion of pensioners concealed their earnings to avoid the double blow of losing their pension and paying tax. If it becomes known that some people have earnings which result in their losing their pensions, they will also be liable for tax on them. That double blow makes it unattractive to go out to work. The reply I received from the Treasury on 8th April was that it was not possible to make an estimate. The Treasury obviously has not made a guess as to what the extent evasion is, but we all know that it is widespread.

What is the effect on the total national income? The Treasury is not the only consideration here. The country must be considered too, and there is also the effect on the national income if we had the benefit of the work contributed by people at present pushed into idleness by the operation of the earnings rule. We might also consider the loss of income tax which does not accrue because people do not earn. The Treasury's answer was that there was no information on which estimates could be based.

The categorical assurance given periodically to the House that nothing can be done about the earnings rule because the figures make it quite impossible is based on a sham. The Departments concerned have not done the necessary work to ascertain whether the position is true or false. There is the usual stonewall opposition, and Ministers are advised to oppose the relaxation of the earnings rule because the Department has set its heart against it.

I think there is an extremely dangerous situation arising, which one could call an alienation or many other things, in which taxpayers and contributors to national insurance and beneficiaries feel that they are getting such a raw deal from society in that they are being asked to contribute too much and getting too little in exchange. There are dangerous social effects in continuing to defy public opinion in a matter of this kind. I think we must warn the officers at the Treasury and at the Elephant and Castle that they cannot continue with this game for much longer. They will have to examine the case much more convincingly if they are to carry the Committee with them.

I do not intend to ask the Committee to divide on this matter tonight, because I have not had satisfactory evidence one way or the other as to what the true effect of the earnings rule must be. I hope I have said enough, however, to show the sort of questions that ought to be examined on this important question. The Department has no idea what the effect of abolishing the earnings rule will be on the supply of labour, the national income, the whole problem of tax evasion or the potential yield of tax and, therefore, the true cost to the Exchequer and to the nation. Hon. Members know that the rule is indefensible, unpopular and widely evaded.

Once again, I must implore the Minister to tell the Committee that it is the Government's intention to get rid of this earnings rule altogether at the first possible opportunity.

Mr. Kenneth Clarke

I am glad that my hon. Friend the Member for Kensington (Sir B. Rhys Williams) does not propose to ask the Committee to divide on his amendment, because I would feel unable to support it, having listened in Committee in the past on these Bills and been persuaded by what he described as the "stone walling arguments" of successive Ministers on the cost of the change of abolishing the earnings rule totally at the moment. Although I shall study my hon. Friend's arguments with care, I am not anxious this evening that we should be pressing for changes which would incur such considerable extra costs as I think the Minister is about to tell us about.

In replying to my hon. Friend, however, I hope that the Minister will admit the serious problem underlying this amendment and the fact that a slightly wider principle is raised about the reactions of the public generally to the national insurance system, which Governments must face up to at some stage.

It appears to many members of the public—I believe with some justification—that successive Governments, in progressively easing the position of the totally destitute and those who are wholly dependent on the State, have begun to build up a sense of grievance amongst those of modest means, whether those means are saved or earned, and one must guard against the position where thrift or small part-time working in retirement are discouraged. On later measures we will raise the question of the extremely low level of disregards in assessing supplementary benefit and the provisions of the Finance Act which have lowered the threshold for the surtax surcharge on small sums of unearned income for those in retirement.

I hope, therefore, that the Minister can give some encouraging words to those on pension affected by the retirement rule, and perhaps in rejecting my hon. Friend's proposals he could consider two other matters which he might be able to introduce in another place which would go some way towards easing the effect of the earnings rule to a slightly greater extent than the welcome changes he has already made in the Act.

First, there is the phasing mentioned by my hon. Friend. When it was introduced, the phasing was an extremely welcome improvement, so that only 50p in the pound is deducted at a certain level, and under the proposals of this Bill as I understand it £13.50 of earnings onwards will find only 50p in the pound deducted until £25 is reached. I believe that 50p in the pound is a savage degree of phasing. When one bears in mind that on that level of earnings going up the scale someone is probably going through the loss of other means-related benefits by way of help with the rent or the rates, a 50 per cent. tax in effect upon the national insurance pension is regarded as extremely punitive, and I hope that the Minister will be able to give some reassurance about the possibility of stretching out this phasing, and introducing more steps before the pension right is totally extinguished by comparatively modest earnings.

I draw the Minister's attention to my Amendment No. 6, which, I am told, is out of order, as a much more substantial amendment will be required to bring about the change I wish; namely, to bring the earnings rule within the ambit of those benefits which have to be considered by the Government in the annual review. I will not quote to the hon. Member what he said in Committee, but I remember the passionate speeches made by the Secretary of State and himself when they pleaded that the earnings rule should go into the annual review. Now that the Minister has made the change to basing the annual review on average levels of earnings, logic demands that the earnings rule in pensions should at least keep pace with that and be kept in line with the other levels of benefit, in order that we can be guaranteed that the earnings rule will not get any more punitive in future years. I hope that the Minister can make some encouraging remarks on that in his reply.

Sir G. Howe

I join my hon. Friend the Member for Rushcliffe (Mr. Clarke) in welcoming the fact that my hon. Friend the Member for Kensington (Sir B. Rhys Williams) has raised this subject. Although the whole Committee welcomes the relaxation embodied in Clause 4, I believe that we cannot too strongly underline the extent to which right hon. and hon. Members on both sides remain discontented with the existence and operation of the earnings rule.

My hon. Friend the Member for Kensington brought expert knowledge to bear on his analysis of the problem. I do not want to go over the ground again, but I have increasingly come to believe, when considering this subject in and out of office—although not with any direct responsibility for it—that there is a degree of mythicality about some of the figures, such as they are that are quoted within, and thereby by the Department and the departmental spokesman in the information given in the Written Answer on 8th April of this year to my hon. Friend the Member for Kensington. The estimate of 20,000 retirement pensioners whose pension is now reduced or extinguished on account of their earnings has always struck me as particularly implausible; and most of the other figures are simply non-existent.

I recognise what the Minister of State said about his own answer; namely, that he will consider whether it might be useful to make such a study. It may well be that that bold assertion represents a triumph of ministerial will over an otherwise inert departmental recommendation. I know not, and I would not wish to press him too far to disclose, what happened.

There has been a degree of durability about the earnings rule, about the figures that are quoted in support of it, and the arguments in support of it, which is truly remarkable. I sometimes wonder whether some humble member of the secretariat of the Beveridge Committee now lingers on in a corner of Alexander Fleming House as a bearded deputy secretary, long past retirement age, notwithstanding the provisions of the earnings rule, churning out the same arguments to Minister after Minister in response to Opposition after Opposition.

I regret that the Government's policy of indiscriminate benefit in other fields may go further than we would like towards preventing them making even modest further changes in the earnings rule. I accept, if anyone is to accept the figures given, the figure for total abolition quoted by the Minister of State. If that figure is to be accepted, the difficulties are increased and made greater by the extent to which other indiscriminate benefits are deployed.

The figures are doubtful. There is undoubtedly evasion, which brings diminishing respect for the law and the National Insurance Scheme. There is undoubtedly a reduction in the totality of national wealth from continued insistence on the retirement conditions, 32 years after Lord Beveridge produced his report.

What is almost more important is that the impact of the earnings rule seems to be increasingly out of tune with the kind of social posture we ought to be adopting towards the desirability of keeping older people in work, rather than out of work. I do not mean keeping them in work perforce, but making it possible, and encouraging them to retire gradually and gracefully and to remain at work. It is a different approach, which commends itself as much to right hon. and hon. Members opposite as it does to me.

For the reasons given by my hon. Friend the Member for Kensington, it is clearly not possible to vote in support of this amendment tonight. However, I remind the Committee of our own party's commitment in the manifesto on which we fought the previous General Election: We shall continue to relax the earnings rule during the next Parliament. Our ultimate objective is to abolish it altogether. It is an objective shared by both sides of the Committee, and I hope that the right hon. Lady and her right hon. and hon. Friends will not look askance at us if we return again and again to this subject, pressing them to press those who advise them to dig deeper into the figures, analyse the arguments more closely and see how much faster and further we can go. I welcome the opportunity of placing on record my party's position on this matter.

8.30 p.m.

Mr. Robert C. Brown

I know that the hon. Gentleman the Member for Kensington (Sir B. Rhys Williams) does not like departmental dogma, but as he knows, the reason for having an earnings rule is that the pension is a retirement, and not an old-age, pension. If a person has to retire—

Mr. G. B. Drayson (Skipton)

Was not this view insisted upon by the trade union movement when the 1946 Act was passed? The unions were afraid that employers would employ old-age pensioners to the detriment of young people. That situation has now gone by. Have they altered their attitude to it since then?

Mr. Brown

I do not defend the earnings rule on principle, but the fact is that it is a retirement pension. I am quoting a bit of departmental dogma to the hon. Gentleman and he does not like it. But there is really not much between us on this issue. What matters is the cost of abolition. The right hon. and learned Gentleman talked of the Conservative Party's commitment in the election manifesto. It is true that it undertook to continue to relax the earnings rule and declared that its ultimate objective was its abolition. But he knew, as I do, that abolition would cost something like £160 million a year. He also knew that when the last Government had the opportunity to relax the rule in 1973, they did nothing about it. Indeed, in 1972 the slight relaxation in the earnings rule was forced upon them by a Private Member's Bill.

Sir G. Howe

The position is now different. The Government have chosen to spend almost as much as it would cost to abolish the earnings rule to reduce the price of milk by 1p a pint. I would seriously argue that there would be far greater joy and far greater social advantage throughout the country if any Government were to come forward and abolish the earnings rule instead of producing a generalised subsidy of that kind.

Mr. Brown

The right hon. and learned Gentleman cannot use the milk subsidy in support because his own Government also subsidised milk, as he knows. The extra penny affords benefit right across the board, mainly to people with children. It is up to us as a Government to determine the priorities. But if we talk of spending £160 million at this stage to abolish the earnings rule, many hon. Members would agree that if we have such sums to play with there are more deserving cases—for instance, the disabled—on which to dissipate the £160 million, rather than simply on the 220,000 persons—and their 120,000 dependent wives—who are in full-time employment.

Sir B. Rhys Williams

Is the Minister accepting this figure of £160 million absolutely without criticism?

Mr. Brown

No, I am not accepting anything without criticism at all. But the fact remains that these were the figures that the previous Government were working on. I should hardly have thought that it was either fair or reasonable—the hon. Gentleman is normally a fair man—to suggest that within a month of taking office as a minority Government we have had time to get down departmentally to study whether the £160 million is £200 million or £100 million.

The hon. Member for Kensington pointed out the difference between investment income and earned income. There may be something in his point, but national insurance benefits are, in general, given to compensate for an interruption of employment—which in this case results from the person's retirement. But to take all personal income into account in deciding a person's entitlement to retirement pension would make the pension a means-tested benefit. That would undermine the contributory nature of the scheme.

The hon. Member for Kensington talked about the extra numbers of people who would be coming into employment. It is a matter of opinion how many more people would come into employment. I am sure many hon. Members would question the desirability of more people over 65 coming into full-time employment. But whether the abolition of the earnings rule was economically advantageous to the country would depend on the number of pensioners who subsequently took up work. It is by no means certain that, however abolition of the rule were made effective, it would result in a large increase in employed pensioners.

I pray in aid the report of the National Insurance Advisory Committee dated January 1967. About the earnings rule the report says the committee was: … doubtful whether it is realistic to suppose that there is any adjustment to the earnings rule which in itself would lead to any substantial addition to the number of elderly people in employment … but it thought it was likely that increases in the limit do result in somewhat more work being done by some pensioners. That is, by those pensioners already in employment.

I have fairly well covered the points that have been made. I am pleased that the hon. Gentleman is not pressing his amendment to a Division because naturally we take on board all that has been said in the debate. I return to the point that it is the actual cost and priority that decide where the money goes.

Sir B. Rhys Williams

The Minister has not given me the assurances that I asked for. He has given a large number of arguments which, no doubt, will be used by Conservative canvassers.

The case against the earnings rule seems to remain intact. I can only conclude by warning the Department that the time will come soon when the House of Commons will not support this sort of claptrap any more. The Government will have to prepare for an early day when the earnings rule must be abolished, because neither side of the Committee, I am sure, is prepared to stand for this situation much longer.

I said that I would not press the amendment to a Division, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 ordered to stand part of the Bill.