REVIEW OF EARNINGS RULE OPERATION.

HC Deb 14 February 1977 vol 926 cc83-112

"The Secretary of State shall review the operation of the earnings rule for retirement and invalidity pensioners and their spouses and the cost of its abolition, including the extent to which it acts as a disincentive to work, and shall lay a report on his review before Parliament by 31st October 1978."—[Mr. Patrick Jenkin.]

Brought up, and read the First time.

6.10 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

With this, we may take Amendment No. 4, in Clause 4, page 6, line 19, at end insert— (3) In section 30 of the principal Act, there shall be inserted after subsection (1) the following subsection: (1A) With effect from such day as may be prescribed in the week containing 6th April in a year mentioned in the first column below, subsection (1) above shall have effect with the substitution for the words 'years' of the words specified in relation to that year in the second column below—

1977	…	…	…	'4 years'
1978	…	…	…	'3 years'
1979	…	…	…	'2 years'
1980	…	…	…	'1 year'

and with effect from such day as may be prescribed in the week containing 6th April in 1981, subsection (1) above shall cease to have effect."'.

Mr. Jenkin

We have reached the Bill a little earlier than we anticipated, but that is no bad thing, because we have a great deal of business to get through, although, looking at the empty Benches in the House, perhaps our business will not take us that long.

The amendment being taken with the new clause is in the names of hon. Members of the Liberal Party, who are conspicuous by their absence, but no doubt we shall have the pleasure of their company later in the proceedings.

In Clause 4, we come back to the vexed question of the earnings rule for pen- sioners and the wives of invalidity and retirement pensioners. We make no excuse for returning to it, even though probably more time has been spent, more ink poured out and more frenzied and inaccurate calculations have been made on the earnings rule than on almost any other social security topic.

It is right to return to this subject because whatever may have been thought right when the National Insurance Scheme became law in 1946, it is clear that the earnings rule has never been accepted by the people of this country and that eventually it must go. It is seen on all sides as very unfair.

For example, a man may collect his full pension when he has substantial savings income, but if he earns a wage his pension is reduced. The rule is a considerable disincentive, because the rate of imputed tax can reach 100 per cent. and the wives of invalidity pensioners can suffer a rate of imputed tax of 135 per cent. The more they earn within the band, the less money they have to spend. It is for such reasons that the rule is bitterly unpopular, and must go.

We have come a remarkably long way in two years. Just over two years ago, the earnings limit was £13 a week. It has increased progressively, first to £20 and then to £35. In the Bill, it is £35 dynamised—a dreadful expression, which means that it will be uprated in line with the movement of earnings.

Credit for this transformation—and many millions of people no longer suffer the impact of the earnings rule—must go to the House of Commons, led by the Opposition, with the Government reluctantly trailing along behind. At each stage, improvements have been achieved in the teeth of opposition from the Government, but the House, perhaps wiser than the Government, has insisted upon these notable improvements. I am pleased to see that the hon. Member for Rochdale (Mr. Smith) has now joined us.

The second achievement of the House is that we have got it clear—and this applies to all parties—that it is our objective to abolish the earnings rule as soon as resources allow. We have also got the Government, after being hammered time and again on the figures which they used to try to resist earlier improvements, to admit that what we argued all along was correct and that their figures were entirely wrong.

They have made fresh estimates on a new basis of the cost of raising the earnings limit, and in Committee we had an important 15-page paper circulated to us setting out the Government's argument. It was typical of the Government that this complicated and convoluted paper was not circulated until the night before the Committee was due to meet. Indeed, some hon. Members did not receive it until the morning of the Committee, and we had to adjourn to allow hon. Members to absorb the information.

The Minister for Social Security (Mr. Stanley Orme)

The right hon. Gentleman might be good enough to give some credit to the Government for having circulated the paper—which was a departure from usual parliamentary practice and one which, I should have thought, was to be welcomed.

Mr. Jenkin

The right hon. Gentleman jumped up too soon. The paper was greatly welcomed. I shall not quote what I said at the time, but we regarded it as an immensely valuable exercise in open government, and the Minister can see its effect by looking at the Order Paper.

We may take some credit for having put the Government on their mettle. I said on Second Reading: If the Government can convince me that £60 million or even £45 million is right, then it is right for us to look carefully at the whole question. If not, it is right to stick to the decision which the House took last year."—[Official Report, 2nd December 1976; Vol. 921, c. 1205.] The Government were proposing to claw back the earnings limit from £50—which the House approved in 1974–to £35, which would be uprated in line with earnings. That is the level at which it stands at present. I took a highly responsible attitude; to some of my colleagues it was perhaps a little too responsible, but when the overriding need is to save public expenditure it cannot be right for us to oppose cuts simply for the sake of cheap popularity. However, we shall oppose cuts if they undermine the whole principle of the National Insurance Scheme, as did the original clause dealing with unemployment benefit for pensions. We shall not oppose changes that leave the principle intact while delaying highly desirable, but, in the last resort, not vital, reforms.

In Committee, we voted against Clause 4(1) partly to voice our general dislike of the earnings rule and partly to keep the matter open for the Report stage. The Government's paper had to be studied, and consultations were necessary. We have had time to look at the paper again, and we have not tabled official Opposition amendments to the clause. We do not intend to oppose what the Government are doing.

Clause 4 contains the biggest savings in the Bill, which was introduced expressly to save on public expenditure. The Government tell us that they expect savings of £60 million gross and £45 million net in 1977–78. Even if the savings turn out to be only half that, it is still right for us not to oppose them.

It is worth examining the Government's case, because we need to be satisfied that we are right in taking our highly responsible view. The Government give as the main argument in costing the reduction of the limit from £50 to £35 that if it were not reduced, many people currently at work and deferring their pensions would take them and continue to work, adding their pension to their earnings. They estimate that the cost of this in 1977–78 would be £38 million. In addition, there is the loss of national insurance contributions and the cost of the Treasury supplement—just under £5 million. An allowance is made for smaller reductions in the pensions of those who earn just over the limit. Taking this as £2 million, the Government come to gross savings of £45 million.

They then argue that there is a second element—the cost of paying the extra adult dependants' allowance for the wives of invalidity and retirement pensioners, which they estimated at £15 million. That sum, plus the £45 million, gives a total of £60 million. However, the Government concede that there will be an extra tax yield of £15 million, which gives a final figure of £45 million.

In previous debates we have argued that the basis of calculation of these figures was wrong and misleading. We argued that they were always changing and that the Government could not produce two consecutive estimates that gave the same figure. The Government have never taken into account the increased earnings of pensioners who found that with the limit raised they could earn more while still keeping their pension. If they earn more there will be a higher tax yield.

We could never accept the Government's figures for those who would defer retirement when the earnings limit was raised. There is powerful reinforcement for those doubts. Last year the figures given to a number of hon. Members in a series of written replies seemed to show that when the limit went up from £20 to £35 the numbers deferring retirement, instead of falling, rose from 120,000 to 135,000. Fortified by those figures we were convinced that it would be right to allow the limit to be raised to £50, in accordance with the decision of Parliament two years ago. We were building on the basis of those figures to construct a convincing case that the cost of raising the limit was, at the most, small and might even represent a saving if one examined the effect on the insurance fund and the Exchequer together.

The Government have now admitted that their figures were wrong. Paragraph 2 of the circulated note reads: the assumptions have been altered in a number of important respects from that used to provide earlier estimates, in the light among other things of experience with changes in the limit in recent years. One could quote many examples of back tracking by the Government. Confession is good for the soul. I hope that there will be some burnished souls as well as red faces in the Department.

Up to 1974 the figures for deferrals were reasonably reliable, because they were based on the records of the weekly flat rate insurance contributions. From 1975 it was no longer possible to sample contribution payers, since contributions were earnings-related and were collected and recorded annually. At that time it ceased to be possible to estimate deferred retirements by reference to contributions. Therefore, all the figures for 1975–76 had to be based on guesses. A new method has been worked out, and the Government claim that it shows higher figures for pension deferments for earlier years and a sharply falling trend of deferments as the earning limit has increased.

In November 1974 the figure for deferments was 218,000. The earnings limit then went up from £13 to £20 and the number of deferments fell to 182,000. In March 1976 the figure was 180,000, when the limit went up again from £20 to £35. The Government now claim that the number of deferments has fallen from 180,000 to 135,000. If that is right it is a powerful reinforcement for their case that substantial additional costs will be involved if the limit is raised to £50 in April.

The Under-Secretary of State reinforced his case in Committee, when he said: This new data source is shown to be a reliable indicator of the numbers deferring retirement".—[Official Report, Standing Committee A, 18th January 1977; c. 282.] Earlier in the Committee he said that the system had been checked against earlier known figures and found to be very accurate.

That is a powerful case, but it is not the complete case. One has to ask how convincing and reliable is the new method and how much faith can be put on the savings that the Government have claimed. If one goes back further in time and examines the position between November 1973 and November 1974, when the earnings limit was raised from £9.50 to £13, one finds that the effect on the number of retirements that were deferred in that period was virtually nil. In fact, the number went up a little, from 213,000 to 218,000. That does not appear to be a powerful reinforcement of the Government's case.

The matter does not stop there. Between November 1974 and March 1976, during which time the earnings rule was eased to £20, deferred retirements fell by 38,000. That is the heart of the case. One could say that all of that trend, or even the whole of it, can be attributed to the worsening economic situation. The Government have recognised that that is a factor that must be taken into account. In paragraph 7 of the circulated document they state that It was assumed arbitrarily that even if the earnings rule limit in 1977–78 remained the same in relation to average earnings as in 1976–77, the number deferring retirement would fall by 10 per cent. to 122,000–90,000 men and 32,000 women—because continuing high unemployment will restrict the number able to continue in work beyond minimum pension age, and because of an assumed continuing slight trend towards voluntary earlier retirement. Apart from any movement in the earnings rule, about 10 per cent. of those deferring retirement would cease to do so, for the reasons that have been spelt out. If that is applied to the period between November 1974 and March 1976 it produces a fall in deferred retirement of about 28,000. That shows that 28,000 out of 38,000 owed nothing to the earnings rule but to high unemployment and other factors. On that basis the most that could be attributable to the earnings rule is about 10,000.

The case could be stronger than that. The fall in deferment may be more than 28,000 and the earnings rule change would have had a small effect, if any. That was the case made out by my hon. Friend the Member for Rushcliffe (Mr. Clarke) and Mr. Christopher Mockler in their pamphlet, in which they showed, on the basis of past figures, that the Government could be out by a factor of 50 per cent. from what they had earlier expected. If that is right, the cost of raising the earnings limit to £50 may well be overstated by as much as £15 million, or even £20 million, on this factor alone.

6.30 p.m.

However, the matter does not stop there. Taking the latest period for which we have figures, from March 1976 to the autumn of 1976, the Government say that the number of deferred retirements has fallen from 180,000 to 135,000, which is a very substantial fall indeed. However, on looking at the paper, one finds that the Government admit that this drop should be regarded as provisional and subject to revision when further data become available. Therefore, one is entitled to be very sceptical about the figure of 135,000, and the number may well be revised upwards, perhaps to 140,000 or 150,000, or even 155,000. Taking all that together, I really question whether, even now, on the basis of the Government's latest paper, the estimate of £38 million attributable to deferred retirements is right.

But that is not all. There is another weakness still in the Government's case. One of the document's more ludicrous arguments is that high taxation—that is, income tax plus the earnings rule—is an actual incentive to work, and that if taxation is relaxed not only will people take no advantage of this relaxation but they may even work less, as their net income would be unchanged. That is spelt out in paragraph 15. I shall not read it all, but I should like to read a bit of it: We have no evidence, however, for supposing that more than very small numbers are able to control their earnings in this way, and it seems unlikely that pensioners are going to work longer hours for more pay as a result of upward changes in the limit. In fact the reverse could apply, in that if full, rather than partial, pension were payable on top of earnings it might encourage some elderly earners to reduce their earnings since less effort was required to maintain their standard of living. I am bound to say that that is a perverse argument, which cannot really stand unchallenged. All experience and common sense suggests that high taxation operates as a severe disincentive to work. One's view of that as common sense is not displaced by the fact that the Chancellor of the Exchequer happens to agree with it. He has admitted that high levels of direct taxation are a disincentive and that tax must be reduced. We are told that he will reduce taxation in the Budget. He was referring to a tax rate of 35 per cent., or perhaps 41 per cent. with national insurance, and the middle management tax rates. However, as I have said, here we are talking about a 100 per cent. tax, or even, in the case of wives, a 135 per cent. tax. To try to argue that there will be no disincentive to work is absurd. What we do not know is what the effect would be.

My hon. Friend the Member for Rushcliffe has pointed out that there are about 500,000 retirement pensioners in work and within the earnings rule age bracket, yet only 5,600 of them actually come above the £35 limit. Is it suggested that the tiny percentage owes nothing to the disincentive effect of, first, the 50 per cent., which is really 85 per cent., and then the 100 per cent.? Clearly, some explanation is needed why this enormous disparity exists between the 500,000 and the 5,600. We have not yet had that from the Government.

It is true that many elderly people will wish to work only part time. It is true that many do not control the amount of work that they can do. However, it cannot possibly be right to argue that this has no effect, that there will be no additional tax yield as a result of people working longer hours. I do not need to assert that myself or to quote my hon. Friends on the subject. The late Brian O'Malley did not seriously deny this. On 29th January 1975 he admitted that if the earnings rule were abolished numbers of people who in present circumstances might well retire would not then retire."—[Official Report, 29th January 1975; Vol. 885, c. 469.] That being the case, they would go on earning and they would pay tax, and that is an offset.

On 29th January 1976 The Times said It is impossible to give the precise net cost to the Exchequer because nobody can be sure how many pensioners would earn more if this disincentive were removed and how much extra would therefore be paid in tax. One could call in aid the Liberal Bench. Mr. Michael Fogarty, who is, I believe, a supporter of the Liberal Party, wrote in his recent publication "Pensions—Where next?", When account is taken of income (but not indirect) tax paid on earnings…it is a fair guess that the cost of abolition would indeed be covered. I think that that is putting it much too high, but clearly there is some offset here for which the Government have allowed nothing. Indeed, if the limit went up to £50 and only 60,000 people took advantage of it to earn an extra £15 a week, the extra income tax revenue would be about £16 million. That factor must be taken into account.

There is one other factor of which the Government must be aware. Quite a lot of pensioners conceal what they earn in order to avoid the effect of the earnings rule. If the limit is raised, they have less incentive to do that.

There is, however, a third doubt about the Government's figures, and it relates to the question of working wives. What we now know from the document—and this is a very major disclosure—is that the Government are simply assuming—they do not know— that 85,000 wives of invalidity and retirement pensioners are in work, and that because of the earnings rule their husbands are not claiming dependancy allowances. The document states that no actual statistics are available of the numbers of married retirement and invalidity pensioners who are not receiving an allowance for an adult dependant because their wives' earnings exceed the limit under the earnings rule. That is a crucial admission. It again calls into question whether the Government are right in putting an extra £15 million as the savings which could be achieved by this factor.

I cannot believe that the right hon. Gentleman's Department is happy with this assumption. The figures are pure guesswork, because the Government do not know how many wives are living apart from their husbands and hence are unaffected by the earnings rule. If the number living apart proved to be 40,000 higher than expected, the so-called savings on raising the earnings limit would be halved—from £15 million to £7½ million. The Government do not know whether those 85,000 wives are actually in work or how much they are earning. The Government do not know the number of wives who have national insurance benefits in their own right—for example, unemployment, sickness or invalidity benefits—and thus are ineligible for the dependancy allowance.

In short, the Government know nothing, but are simply guessing a great deal. Indeed, if the various disablement organisations are correct, it seems more than likely that the Government have yet again on this occasion overstated their case and that the true saving is nearer, say, £5 million or £10 million than the £15 million suggested in the note. So we have three major points of uncertainty. We do not know whether the number of deferments fell to 135,000 in November; we do not know what the extra yield from additional earnings will be; and it is pure guesswork what the effect on the wives of invalidity and retirement pensioners is.

Some people might argue that given all these doubts we should be well justified in insisting on keeping what Parliament decided in 1975–a provision that the earnings limit should rise from £35 to £50. However, I do not think that, in today's circumstances, it is right to oppose expenditure cuts simply because one can raise doubts, albeit serious doubts, about the validity of the cuts intended to be achieved. The need to cut public spending is so pressing and so immediate that if there is a reasonable prospect of achieving even some of the savings aimed at—the Government's figures show that there is a reasonable prospect that part of the savings will be achieved—in the absence of overriding argument to the contrary it would be wrong for me, speaking at this Dispatch Box, to oppose them. Still more—I have to say this with some grief—would it be wrong for us to support an amendment that committed the Government to rising expenditure over the next few years, as the Liberal amendment certainly does.

The Government have been very helpful and have given figures, in an attachment to a letter to the hon. Member for Islington, South and Finsbury (Mr. Cunningham), which show, as I understand it, that the effect of the Liberal amendment would be to add £12 million this year, rising to £27 million next year, then to £46 million, and then to £74 million, and finally, by easing the rule for retirement pensioners altogether, to £118 million. Those are cumulative figures. I do not think that it would be right to do that. I find it difficult to believe that the Liberal Party, which, after all, joins us in arguing that there must be reductions in public expenditure, can be seeking to commit the Government to that additional expenditure.

We now have the position that the earnings limit will move in line with earnings. It is now £35. By next November it could be £41 a week. Compared with the £13 a week, which it was a little over two years ago, that is not bad progress. I believe that we should be content with that for the moment. But we can ask for a much clearer verification of the figures than the Government have so far given us. In the new clause we ask for a review and report on the effect of the earnings rule.

I should like to suggest what the Government might now do. First, they should ask a sample of pensioners who currently defer retirement whether they do so because of the earnings rule. That is the simplest way of ending speculation whether the end of the earnings rule means that nobody will defer retirement. In the CPC pamphlet it was assumed that the breakdown between those who would have deferred retirement and those who would not would be about fifty-fifty. That can be verified only by a survey.

Secondly, the Government should consult organisations such as Age Concern and the Department of Employment about pensioners who are in work and ask them whether they would resume or continue in work or work longer hours if the rule were eased, as they have done in the past. I suggest that only a sample would be necessary.

Thirdly, the Government should find out more about the 85,000 working wives. They should find out whether the figure is accurate. Again, there should be a sample survey to find out how many are living with their husbands, whether they are in work or in receipt of other national insurance benefits which would prevent their husbands claiming a dependency allowance. That is what the new clause asks for.

In return for what I feel is a responsible and proper attitude by the Opposition in not opposing the Government's savings at this stage, the Government could at least undertake to review and report on the matters which I have described. This is a matter of intense interest to hundreds of thousands of people. I hope that I have succeeded in casting sufficient doubt upon the figures for the Government not to be able to claim that they are 100 per cent. right. Obviously they are not. The Government must now eliminate the guesswork and establish the facts so far as they can.

Mr. Cyril Smith (Rochdale)

I rise to speak to Amendment No. 4, which is being taken in conjunction with New Clause 4, which was moved by the right hon. Member for Wanstead and Woodford (Mr. Jenkin).

I hope that the Government will accept the new clause because, as with most Tory amendments and new clauses, it does nothing other than add something that suggests that there must be a review. Amendment No. 4 is concerned with doing something practical and realistic rather than just calling for a report in time. Indeed, my experience is that those who want to do nothing usually call for a report. I understand that that is what the new clause is about.

It seems to me that we need to argue the principle of the earnings retirement rule. Academic arguments about which figures are correct, why they are wrong, why they might not be wrong and why computers do not work, and so on, are interesting, but, as I said in Committee, they are arguments for academics. They do not particularly attract or interest me.

What interests me is what interests my constituents. They are interested in the fact that they pay for a pension and that, if they decide to continue working after pensionable age and if their earnings exceed a certain amount, the pension is reduced in consequence. It is the principle to which they object. They are concerned not whether the Government have got their figures right, whether the computers work, or any of this interesting academic argument, but whether their pensions are being reduced in consequence of their decision to continue to work.

6.45 p.m.

I accept that with regard to the principle the argument is basically whether we are talking about retirement or old-age pension. I take the view that we are talking about old-age pension. Those who support or pay lip service to wanting to abolish the earnings rule but do nothing about it, talk about a retirement pension. What matters is the way that it affects people's pockets—in other words, what they have to draw at the end of the week.

The object of the amendment is to establish the principle that the earnings rule should be abolished in time. I understand that all parties want to abolish it. However, we shall not abolish it as long as we keep making the excuse that the time is not opportune to begin to proceed in an orderly fashion towards its abolition which Amendment No. 4 would allow us to do. The Bill amends what was agreed in 1975, which would have led towards the ultimate abolition of the rule. The Bill now ensures that the rule will continue for many years— indeed, for ever. All that it does is to index-link the figure.

Mr. Orme

It goes up.

Mr. Smith

I said "All that it does." Of course it goes up, but, as the right hon. Gentleman knows, first, it does not bring it up to the figure that it would have been had we implemented the 1975 proposal and, secondly, it does not abolish the earnings rule. It adjusts the figure to which the earnings rule applies in relation to current earnings, and so on. That is all that it does. It takes no step towards the principle of abolition, which is what the argument is about. Unless the Bill is amended, the earnings rule will not be abolished. The question is: should the earnings rule be abolished and should the Committee take the opportunity of moving in an orderly fashion towards its abolition?

In Committee I said—and it is worth repeating—that I took the view that there was nothing morally wrong—indeed, there is much to argue in favour of it—in a person entitled to pension continuing to work if he chooses to do so. In my view, to penalise him for continuing to work is quite wrong. In any case, it is arguable whether it is morally defensible that two people of the same age, having paid the same amounts into a pension fund, should not get an equal pension at the end. But the position is that one gets less than the other if he decides to continue working. That is wrong, and that is what the amendment seeks to put right over the years.

I understand the economic argument. However, I can only repeat what I have said before. In my experience of public life there is never an opportune time to do anything if one relies on the economic argument. One can always find economic reasons for doing nothing.

It is alleged that the amendment would increase public expenditure. I hope that the Minister will expand on that aspect. I read the memorandum of which he sent me a copy. The £12 million is based on the fact that the figure is left at £35 indexed. If that be correct, it is suggested that the saving will be £12 million less if the amendment is accepted.

What we are talking about is reducing the saving by £12 million, not increasing the amount by that sum as the law now stands. That is a different argument, and I hope that my interpretation of that fact will be either challenged or accepted, because it is important to the economic argument.

I tabled Amendment No. 4 in the form in which it appears on the Amendment Paper because in Committee the hon. Member for Islington, South and Finsbury (Mr. Cunningham) indicated that this was a possible way of abolishing the earnings rule.

Mr. Orme

The hon. Gentleman pinched it.

Mr. Smith

Yes, I did. I have always taken the view, and it is as well to restate it, that I prefer to judge an issue on its merits rather than on the source from which it emanates. I am not concerned whether it comes from the Liberals, the Tories or the Labour Party. If what is suggested is right, I shall vote for it. On this occasion the hon. Member for Islington, South and Finsbury had a useful idea and I felt that it was worth raising the matter so that it could be debated on the Floor of the House.

Under my amendment, the earnings rule will be abolished in time. I accept that it does not affect certain invalidity pensions, but once the principle of abolishing the earnings rule is established any Government will have a problem in maintaining the rule in relation to one set of pensioners and not in relation to another. I believe that the amendment is worth pressing even though certain sections of pensioners will not be affected. It will at least establish the principle, and it is the principle with which I am concerned.

The 1975 amendment to the earnings rule, which raised the limit to £50, was based on figures that were evident then. If the House does not want to take a step back on what it did in 1975, the figure of £50 should be increased. Alternatively, the House should accept my amendment because what the House decided in 1975 was that it wanted the earnings rule abolished. What the Bill does is to say "We understand that that is what the House wanted in 1975, but we are not proposing to do it in 1977 because we cannot afford it. However, as a sop we shall include an index-linked provision which will be some compensation."

I do not accept that as compensation for the original proposal, because that proposal was concerned with abolishing the earnings rule. All that index-linking does is to ensure that no more than the present number of people are affected. It goes no way towards abolishing the earnings rule. Therefore, it would be proper for the amendment to be accepted, and I commend it to the House on that basis.

Mr. David Price (Eastleigh)

The hon. Member for Rochdale (Mr. Smith) knows that I have great sympathy with the case that he has made. However, where he and I differ is that whereas I agree that he is right to press the Government for their views on the proposal that emanated from the Government Benches— from the hon. Member for Islington, South and Finsbury (Mr. Cunningham), whose ideas on a method by which the earnings rule could be abolished I found attractive in Committee—I disagree with him when he says that economics do not matter. We are suffering from rip-roaring inflation, and I cannot regard the abolition as of the earnings rule as the No. 1 priority in the whole range of expenditure undertaken by the Department. If there is any money going, I would put forward other priorities, and I think that if the hon. Member for Rochdale and I were to have a heart-to-heart talk I could convince him that even in Rochdale there are matters that should take priority over the abolition of the earnings rule. For that reason, I cannot go along with the hon. Gentleman.

I think that it would help the House and our continuing debates—because this is an ongoing situation—if the Government would make clear—as I think they have hinted—that it is their long-term objective to abolish the earnings rule. The method proposed in Committee by the hon. Member for Islington, South and Finsbury and now in the amendment—of reducing the provisions yearly—is probably a more attractive way of doing it than raising limits.

I was persuaded by the hon. Member for Islington, South and Finsbury that that is the right way to approach the matter, and therefore it would be useful if the Under-Secretary of State, who is winding himself up to wind up the debate, would give us some assurance on the matter. It would be irresponsible to force a Division on the amendment. I say that with respect to the hon. Member for Rochdale, because if we are up for bids for extra money from the Department I have claims that I should put ahead of what is proposed in the amendment. I suspect that the Minister would agree with me on that, particularly when one bears in mind the matters that we shall discuss under Clause 11.

I would place maintaining the purchasing power of the mobility allowance ahead of abolishing the earnings rule as a priority. In the present state of our national affairs, all of us who press a certain issue on Ministers have to say where our priorities lie. It is all too easy for any of us to say we want more expenditure on desirable objectives. All of us who follow these social security matters are at one in our desire to improve the whole range of facilities provided by our social security system, but it is irresponsible for any of us to press claims of increased expenditure unless we are prepared to say where our priorities lie. Much though I agree with the hon. Member for Rochdale, what he proposes is not my top priority at the present moment.

Mr. Robert Boscawen (Wells)

I found it strange to hear the hon. Member for Rochdale (Mr. Smith) chiding the other parties for not having a practical or realistic earnings rule. This is a Liberal amendment, but when the other parties did something practical in 1975 that started us on the slippery slope of phasing out the earnings rule, the Liberal Party was not represented on the Committee and did not make any fuss about it.

Mr. Cyril Smith

With respect to the hon. Gentleman, that is a stupid observation. The Liberal Party has nothing to do with who serves on a Committee. The membership is decided by the Committee of Selection. Some of us are stuck on Committees to consider Bills in which we have not the slightest interest. The other day I was stuck on a Committee dealing with a Bill about cemeteries and burials. It is wrong of the hon. Gentleman to criticise my party because it was not represented on the Committee. If a Liberal had been appointed to the Committee but was not present to take part in the debates, or to vote, I would accept criticism of his absence as being fair. I do not accept as fair criticism the fact that we were not on a Committee, because, as I say, that is not a matter for us. It is stupid to make that kind of criticism.

Mr. Boscawen

Everybody knows that if someone makes enough noise on Second Reading he will be stuck on the Committee, irrespective of the party to which he belongs. If the Liberals had made enough noise about the 1975 proposals, they would have been represented on the Committee. I was on that Committee and had a part to play in the countdown towards ending the earnings rule.

Apart from the exigencies of the economic situation, there is an overwhelming case for getting rid of this earnings rule. It is a rule that I consider to be offensive, but it is difficult to get rid of it at the right time. That is why it was phased over a period. Circumstances have changed since 1975, and the particular circumstance that makes it even more difficult to make a change now is the high level of unemployment. There is bound to be more reluctance to make it possible for those who have reached retirement to continue in work and thus take up jobs that might be available to young persons. Circumstances will change again. Therefore, the Government must not get locked into this situation. They must be ever ready to change their views on abolishing the earnings rule and they should seek to do so at the earliest opportunity.

7.0 p.m.

The new clause makes the Government have another look at this, challenges their figures, and makes them look again at the cost of abolition. It is not altogether right to look directly at the cost of abolishing the earnings rule. The Government ought to look also at the cost of not abolishing it. Undoubtedly, if people are forced to give up work because of the earnings rule or if they think it is not worth while to continue in work, the cost of health care will be increased considerably in a number of cases. There is a psychological effect on people who suddenly cease to work or suddenly are no longer encouraged to work. That ought to be taken into account.

I am convinced that we shall never know how much the Government will lose by the abolition of this rule. Nevertheless, they should show us the figures again. I hope that when circumstances have changed—when unemployment has been reduced and we are on the road to recovery —we shall see an end to what is generally agreed to be an offensive rule.

Dr. Alan Glyn (Windsor and Maidenhead)

Those of us who have been in Parliament for a number of years will appreciate that the earnings rule is a thorny problem which always raises emotions. Percentages are always high. We must examine the figures carefully. We have to look at this subject against the background of the 1975 Act and against the extraordinarily difficult economic background. I can remember the days when I used to have to write to people who pressed this point and say that the purpose of a pension was to compensate people for not working. This has now completely changed and people believe that, having paid for a pension, they should receive one. That is a good argument for the eventual abolition of the earnings rule. The questions are: When should it be abolished, and under what circumstances? The Government have put forward some proposals, as has my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin).

We must look carefully at the grounds, which my right hon. Friend outlined so clearly, for estimating the cost of abolition. I shall not praise or criticise the Government, but this is one of the most difficult calculations to make because there are so many factors involved. I do not normally give the Government credit for anything, but it is a difficult calculation. Nevertheless, every effort must be made to arrive at that calculation before the House can come to a sensible decision. What about the 5,000 wives, whether or not separated? What about the clawback in income tax? We must consider all of this before we abolish the rule.

I would be much happier if the Government had been able to state the exact cost, or, at least, to give an estimate. The House could then come to its own decision. This is an important matter. There are many people who want to go on working, who can give valuable service, but who are given no incentive to do so. There is often a disincentive. There is a disincentive of 135 per cent. for a married couple who both work. That is a problem. We are also faced with the problem of high unemployment. We have to balance both these factors of economy and unemployment. I believe it is right to say that most people do not understand the rationale behind these proposals.

I cannot support the amendment of the hon. Member for Rochdale (Mr. Smith) because it does not cover all the groups of people whom I should like to see included. We also want to know what it will cost, and how many people will remain in their jobs. We need to look at the national background. In the long term the country wants to see the abolition of the earnings rule and people want to receive a pension for which they have paid as of right and not as an act of grace.

I hope that my right hon. Friend's new clause will be accepted by the Government. It will help the move towards the complete abolition of the earnings rule which I think most people want.

Mr. Tony Newton (Braintree)

I am tempted to support the amendment moved by the hon. Member for Rochdale (Mr. Smith). In many ways it seems to be a good compromise between the cost of £45 million claimed by the Minister—whether that figure is right or wrong, we can agree that previously the figure was quite substantial—and the Government's proposal. To reduce the figure, as the hon. Member for Rochdale wants to do, from £45 million, on the Government's figures, to £12 million, again on the Government's figures, would not have been an unreasonable compromise. I am doubtful about it because it excludes the worst affected category, namely, the husbands or wives of invalidity pensioners.

Even at £12 million I can see many other competing priorities, some of which would have to be put above raising the earnings rule further. It is right that we should concentrate our attention on the new clause. It has an advantage in that it ensure that, after what we are reluctantly accepting in the Bill, the House will not be able to forget about the matter and regard it as settled for ever. A report will have to be given to the House on the basis of a further Government survey of the situation and the possible disincentive effects of the earnings rule.

I do not want to spend a lot of time on statistics, which my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) has dealt with admirably, except to say that it is possible to go on arguing about the Government's mistakes in the past, their possible mistakes in the present and their, no doubt, certain errors in the future almost ad infinitum. To draw any large conclusions based on the numbers of people working beyond retirement age, in a period when the level of unemployment has been at its highest for a generation, is bound to be a doubtful operation. It is almost impossible to disentange the effects of the changes in the earnings rule over the past two years from the effects of the fact that it is difficult to get work. We should not build too much of a statistical edifice on this uncertain foundation.

What I also find it impossible to believe is that there is not some significant disincentive effect in having the earnings rule at all. I recall that, after becoming a Member of Parliament in February 1974, the first occasion on which the earnings rule was drawn to my attention—admittedly it was at a time when the level was, I think, only £13, certainly much lower than now—was when two elderly ladies came to see me. These ladies were in the habit of doing some cleaning work at one of the local hospitals. The form in which they put the problem to me was not, as I recollect it, that the rule was unfair and that they had to pay a lot out of their earnings because of its working. It was that they were being forced to reduce their hours. They looked on the earnings rule as virtually setting the official limit to the amount of work they were allowed to do. When their pay went up and the earnings rule was not changed they cut down the amount of work they did so as to stay within the limits of the earnings rule.

I cannot prove how typical or widespread such action is. I suspect that with the growing sophistication that people have about the interaction of these rules with the social security system and the tax system, such a practice is quite widespread. People are more sophisticated about such matters than they were. They are aware of the effect on their take-home pay of various actions.

The fact is that the earnings rule is seen by many as setting an upper limit to the amount of work that they are prepared to do. It may be argued by Labour Members that that is no bad thing at a time when unemployment is so high. It would be possible, I suppose, to say that we ought deliberately to be discouraging retired people from working to provide more employment for younger people. Even if that argument were to be accepted at a time when unemployment nationally is at almost 1½ million, let us be under no illusion that in the strategic situation in which the country now stands it is an absolutely idiotic argument.

There are two points here. The first is entirely general. To me, at least, the biggest single problem from which the country is suffering is the degree of disincentive at almost every level of society, in every class and every walk of life. People on high earnings, average earnings and low earnings all feel the same thing. More than anything else the country is suffering because people simply do not think that it is worth their while to do a bit of extra work, to take promotion, to put in extra effort or whatever. Ministers may choose to deny that, although Treasury Ministers have been increasingly reluctant to do so and now show signs of accepting that argument. The earnings rule is part of that argument. It is part of the society we have created in that we are doing more to discourage people from putting in extra effort. In our strategic situation that must be mad.

The other point is more specific. Before I came into the Chamber I was glancing at the relevant part of the consultative document on priorities issued by the Department of Health and Social Security in 1976. Paragraph 5.1 says: There are now more than 6½ million people aged 65 or over in England and they comprise about 14 per cent. of the total population. Since 1961 the total population has grown by 7 per cent., but the over 65s have increased by over 25 per cent. This trend will continue until 1981. By 1980 nearly 15 per cent. of the population will be 65 or over. The number of over 75s, who are the heaviest users of health and personal social services, is expected to rise by half a million over ten years. I looked also at a report in The Times of 14th December of the study by the Central Policy Review Staff on population and some of the strategic problems in social policy over the next few years. The report in The Times said: The increase in the proportion of the population over retirement age beyond 1990s is the report's most significant forecast in terms of spending implications. These factors point to what we all know is one of the major problems the country will face over the next two or three decades, especially with the birth rate falling at the same time. I refer to the growing burden of the retired population on those who remain in work. In this situation, when we shall be worrying more and more about how to meet our obligations to the retired population, it must make sense to maximise the opportunities for those who would like to go on working and contributing to the output of the national economy.

In that context it seems that the proverbial man from Mars, descending to this planet and faced with a society in which we are worried about incentives to work across the board, in which we are worried about the growing burden—in this rather narrow sense—that our elderly population will present in the light of demographic trends, would think we were mad to have a rule in our system which appeared specifically designed to prevent those over 65 who wished to work from doing so.

Mr. Bruce Douglas-Mann (Mitcham and Morden)

I have a great deal of sympathy with what the hon. Member is saying. Would he not agree that by setting the limit at £35 the Government have gone a long way to meeting his case? Would not the consequence of what he is putting forward be that a great many people, for example, Members of Parliament, would start drawing their retirement pensions while remaining in the House? Surely that is not the wisest expenditure of public money at the moment.

7.15 p.m.

Mr. Newton

This is why I began my speech by acknowledging the problem as it exists. I am ultimately prepared to accept that in the real world today, with our public expenditure problems, our taxation problems and our other priorities. we probably have to accept what the Government are putting forward. I am advancing the case for the report and the review as set out in the new clause because I believe it to be vitally important that we do not just leave the matter here.

We cannot do everything we want to do at this time. In our society, as it is expected to develop demographically over the next two or three decades, we should be seeking to give the maximum possible encouragement to every section of our population, including those over normal retirement age, to contribute to our economic output where they wish to do so, thus increasing our resources. I cannot quantify the exact extent to which the earnings rule at this level or any other has a disincentive effect. The overwhelming implication is that it has some disincentive effect and I do not believe that we can afford to allow that effect to remain. The sooner we get rid of it the better. The new clause is at least one step we can take to ensure that the problem is not forgotten and to be certain that we resume progress towards abolition of the earnings rule, which is what everybody would like to see.

The Under-Secretary of State for Health and Social Security (Mr. Eric Deakins)

That last comment of the hon. Member for Braintree (Mr. Newton) gives me a rood lead-in, since it reinforces what has been a theme of this debate and, indeed, of our Committee proceedings when we considered the clause dealing with the earnings rule, namely, that all sides recognise that the earnings rule is undesirable for a whole variety of reasons.

The Government and, I suspect, the Opposition, and perhaps the Liberals, have made a commitment to phase out the rule as soon as resources permit. The Government's commitment was made clear by the Secretary of State in moving the Second Reading and has been reiterated by my right hon. Friend the Minister of State and myself in Committee. The Government do not need to carry out a formal review of the rule in 1978 to emphasise that abolition is and remains their long-term intention. I hope that the hon. Member for Eastleigh (Mr. Price), who asked for the commitment to be put on the record once more, will accept that. I do not want to quote from the statements made in Committee or during Second Reading. There are sufficient references for future historians to see that at least in the past couple of months all parties in the House have placed firmly on the record by one means or another their commitment to abolishing the earnings rule.

The right hon. Member for Wanstead and Woodford (Mr. Jenkin) raised a number of queries on the figures and suggested that we should do some more work leading up to his suggestion in the new clause that there should be this proposed review. I suggest to him and his hon. Friends that this review would be little more than an additional piece of work placed on the Secretary of State and a rather hard-pressed Department. It would not, in itself, make funds available for the abolition of the earnings rule, nor would it bring forward the date on which abolition could be afforded. The right hon. Member raised a number of points about the number of people deferring retirement, the tax yield from additional earnings from those who stay on at work and the assumptions we have made concerning the wives of retirement and invalidity pensioners and so on. I fully accent that we have made estimates. When I say "we" I am speaking for the Government but also for those experts who advise all Governments in these matters.

Estimates have been made. They are much better estimates than have been given in the past two years in answer to various Questions. The reasons why they are much better estimates were given in the document that was circulated to members of the Committee and were discussed there. There is no doubt, therefore, that while we cannot be 100 per cent. certain that we have got the figures right—no one would attempt to say that we have got them perfectly right—we are sufficiently confident of the estimates and, what is more important, the Treasury is sufficiently confident of the estimates—since we are asked to make these public expenditure savings—to enable us to go forward believing that we have got them as near right as possible on the basis of the information available.

I am prepared to accept that the figures may be wrong. The important question is by how much they are wrong. But I am confident that they cannot and will not be as wrong as previous estimates have been in the past. I am sure that that will be accepted. Some hilarious examples were given in Committee. It was said that we were wrong in one estimate by about 60,000. I do not think that that is likely to happen again. The reason why that estimate was wrong was given in Committee, and I do not want to bore hon. Members by giving it again. But it is in the nature of estimates that they can be wrong. The question is by how much.

The right hon. Gentleman as well as saying that our figures could be wrong, suggested that they could be wrong in only one way. He would not accept the possibility that the figures might be wrong in the other direction. With statistics one can be wrong in both directions. But I am prepared to accept from him that if they are wrong they are more likely to be wrong in the direction which he suggested than in the other.

The right hon. Gentleman asked the Government to do more work. Some work has been done— a survey of pensioners deferring retirement, consultation with pensioners' organisations, a survey of working wives and so on. I would not want to rule out any such activity, although it would not necessarily be for my Department. The Government Actuary might wish to do it, or at least be associated with it, since he was responsible for drawing up a number of the figures and assumptions on which we have proceeded.

While we can refine the figures and eliminate guesswork by having more and more surveys—I accept that it may be necessary to do some—we have to bear in mind the cost of conducting such surveys and administrative burden at a time when in the Government generally, and we in our own Department, are seeking substantially to reduce the number of civil servants.

Nevertheless, I have taken on board the right hon. Gentleman's suggestions. I shall consider his three suggestions and write to him in due course about them I do not want to suggest that my under. taking should in any way inhibit him from doing what he wants on the issue of the clause itself. I give him and the House an assurance that the Government will always seek to have available for the House as a whole accurate and up to-date costings for any future parliamentary debate. We do not necessarily need to have a debate, since we are concerned basically with what is the latest estimate of the cost of abolishing the earnings rule at any one time. Now it is to be £35 dynamised, next year perhaps £40 dynamised, and so on.

The rule will obviously be kept under review. I give that assurance. There will also be the annual dynamisation—to use that horrid word—of the earnings rule under the clause as we passed it in Committee.

Instead of by a statutory review, the answers could easily be supplied in response to Questions if hon. Members wished to keep up to date on the figures. I and my colleagues will do our best to keep the Department on its toes in ensuring that the figures are up to date. If it was felt that the figures showed a very large difference from the figures given in Committee—if, for example, the figure of £60 million turned out to be £6 million—that would greatly strengthen the argument for going ahead with abolition of the earnings rule, since there would then be very little public expenditure involved. But I do not think that future figures are likely to be that much wrong.

The new clause deals not just with retirement pensioners but also with invalidity pensioners. I wish to make clear that there is no earnings rule for invalidity pensioners. I do not want to be accused of splitting hairs, making points on semantics, but I must put that on record. There is a therapeutic earnings limit, but this limit is not comparable to the earnings rule for retirement pensioners in character, purpose or effect. Invalidity benefit can be paid only to people who are incapable of work, and the vast majority of people who get invalidity benefit earn northing at all.

Special provision has been made for such people—largely in hospital or in local authority day centres—who might earn a little from doing something that is primarily therapeutic. Their "earnings" must not ordinarily be more than £9 per week. Even if the work is not actually done under medical supervision, it must be done with the doctor's approval. The figure of £9 is no more than a measure of the amount of therapeutic work which might be done without inevitably conflicting with the principle of incapacity for work which applies to all invalidity pensioners. Total abolition of any restriction related to earnings would, of course, make nonsense of incapacity benefits, and there can be no question of reporting to Parliament on any such thing.

As I told the Committee, the Department is currently sponsoring a survey which will throw further light on the effects of the present therapeutic earnings limit on invalidity pensioners and on the availability and conditions of "employment" open to them. This is still at the pilot stage and it is not possible to say when the study will be completed, but future policy on cash benefits for sick and disabled people generally will take account of the findings of this survey.

I turn now to Amendment No. 4, presented on behalf of the Liberal Party by the hon. Member for Rochdale (Mr. Smith). The hon. Gentleman made the point that, in principle, the Liberal Party wants to see, if not immediate abolition, the phasing out of the rule rather along the lines suggested by my hon. Friend the Member for Islington, South and Finsbury (Mr. Cunningham) The hon. Gentleman's amendment, by progressively reducing the number of years over pension age at which the earnings rule would cease to apply, would abolish the rule entirely for retirement pensioners as from April 1981. It would be necessary also—I say this for the record—to make an appropriate amendment to Section 27 of the Social Security Act, which sets out the conditions which a person, on attaining pension age, must satisfy before he can be treated as retired in order to be entitled to retirement pension. I do not wish to develop that in detail but, if the amendment were to be passed, obviously something would have to be done, perhaps in the House of Lords.

Our objection to Amendment No. 4 is based solely on the cost involved and the timing proposed. As we have made clear, and as I have re-emphasised today, the Government are committed to the principle of abolition of the earnings rule when the economic situation allows. It is accepted moreover that phasing out, though not necessarily as proposed in the amendment, would be one of the methods which the Government would have to consider when abolition became an economic possibility. But the amendment would commit the Government to an immediate increase in expenditure, and figures were circulated to the Committee on the basis of my letter to my hon. Friend the Member for Islington, South and Finsbury—rising from £12 million in 1977–78 to £118 million in 1981–82. However, it should be noted that the cumulative cost of £118 million misses out the figure of £32 million for the cost of abolishing the rule for dependent wives of invalidity and retirement pensioners, which would make a total of £150 million, the figure over which we argued in Committee.

Very little of that additional expenditure would go to existing pensioners, few of whom have earnings in excess of £35 per week. We estimate that there were 5,600 in July 1976.

7.30 p.m.

These benefits, this public expenditure, would instead go to people in regular employment who had become entitled to pension in addition to earnings. In present economic circumstances and in view of compelling priorities—I am very grateful that the right hon. Gentleman and other speakers recognise this—the Government cannot accept that kind of commitment to additional expenditure. Therefore, if Amendment No. 4 is pressed I shall have to ask the House to reject it.

Although we cannot accept New Clause 4, I hope that my undertakings will satisfy the right hon. Member for Wanstead and Woodford that the Government's intentions are honourable. We shall be doing more work and trying to refine the figures in a way which will enable us, when economic circumstances permit, to come forward with positive proposals, based on the latest available information about abolition of the earnings rule.

Mr. Cyril Smith

The Minister talks about a saving of £100 million and more. Will that saving be achieved if the law is altered as the Bill proposes, or if the existing law stands?

Mr. Deakins

The cost given in the appendix to the note circulated to hon. Members is the estimated cost in 1977–78 on top of an earnings limit of £35 increased in line with earnings as proposed in the Bill.

Mr. Patrick Jenkin

The Minister has replied fully and fairly to the debate, as he always strove to do in Committee. I have made our position clear, that we want this rule ended, but I accept the view—in this I am grateful for the support of a number of my hon. Friends—that this is not the moment to do it. However, I hope that the Minister will do his best to see that his Department lives up to his undertakings. We shall continue to probe, through Questions and other means, to test whether the assumptions and cases in the paper that we were given in Committee are borne out in reality.

As the Minister said, if it turned out that the cost was £6 million and not £60 million, he would probably have the utmost difficulty in persuading the House to retain the rule for one month longer. But because it may be, if not £60 million, £45 million—even if it were only two-thirds or half that sum—he has made out his case.

We have to accept the £35 dynamised. However, as I said, since we started with £9½50, which rose to £13, then to £20, then to £35, and now to £35 dynamised, the House can be well pleased with progress. I think that millions of pensioners now feel that justice has been done. I hope that those who still feel penalised by the earnings rule will agree that the House will try to get rid of it as soon as possible.

Question put and negatived.