Where the state pension is means-tested by family wealth. Britain beware

Telegraph

7 hours ago

The rising cost of the state pension is not just a British problem. Countries around the world are grappling with the problem as birth rates fall, populations get older, and the burden on taxpayers rises.
Britain's current state pension bill is a colossal £158.6bn, and this is predicted to grow to £181.8bn by the end of the decade, according to the Office for Budget and Responsibility (OBR).
One of the quirks of having a universal pension system is that the UK subsidises the retirement of millionaires.
The number of top-rate taxpayers – earning more than £125,140 a year – aged over 65 has tripled from 44,000 in 2021-22 to an estimated 137,000 in this tax year, according to HM Revenue and Customs (HMRC). Nearly one million pensioners are higher-rate taxpayers, drawing down an income of more £50,270 a year.
Suggestions of how to cut the pensioner benefit bill have previously included means-testing the state pension, scrapping the 'triple lock', or raising the retirement age further.
Other countries have taken a different tack to reduce their state pension bill, and one Latin American country uses an unusual metric to determine whether pensioners are eligible for state support.
Wealth of the household not individual
Chile has long been a leader in the development of pension schemes. The country was one of the first to introduce the defined contribution (DC) model, which has become Britain's most common workplace pension.
However, the payments were not enough to keep pensioners in a comfortable retirement. The replacement rate, or how much of a person's income when they retire is replaced by their savings and state pension, was lower than in other countries.
This was for two key reasons. One, that the contribution rate of 10pc was not enough, and two, that many workers were paying in for just 20 years, rather than the 35 to 40 years that is standard in Britain. This is because many Chilean workers have periods of what's known as 'informality' – or being self-employed.
In 2008, following politicians' concerns about the income levels of the poorest pensioners in Chile, a 'solidarity pillar' – a state pension – was introduced. Unlike the UK's state pension, it was means-tested, originally aiming to bring the bottom 60pc of the pensioner population up to a 'minimum floor'.
What sets it apart is that eligibility is determined by familial wealth. Those living in the richest 10pc of households are not eligible.
Household wealth is assessed on income, family composition, housing, education, health and other factors, according to the Chilean government – all of which is used to give a socio-economic bracket. This has helped to keep the bill for state support for pensioners down, despite a significant expansion in 2022.
Shortly after the pandemic, a reform meant that those over the age of 65 began to receive the 'pensión garantizada universal' (PGU), if they met the criteria. Those with an income of less than $1,210,828 (£955.30) a month would be eligible, whether they were still working or not.
To qualify, a pensioner must have been resident in Chile for at least 20 years since they turned 20, and for four of the five years before they claim. But most importantly, their family wealth, measured by the Social Household Registry, cannot place them in the top 10pc of the population.
Dr Pablo Antolin, of the OECD, explained: 'Imagine that you have a partner, a wife or a husband, who is working part-time or not working at all, and the other one is fully working and is wealthy. They have a lot of money.
'If you do it based on the individual, the second wage earner or the second member of the couple will be getting the solidarity pillar while they're living in a household in which they have lots of money. That was the main argument for using family wealth.'
All aspects of wealth – and all those who live in the household – are taken into consideration.
Dr Antolin added: 'They take savings and houses [into account]. Because obviously, as we know, in countries like the UK, house ownership puts you in the top level of the income scale.'
A socio-economic debate
This is in stark contrast to how most benefits are means-tested in the UK, where eligibility is typically determined by an individual's wealth.
For example, Chancellor Rachel Reeves's long-awaited U-turn on winter fuel payments will see the money paid to pensioners with annual individual incomes of less than £35,000 – no matter what their spouse earns.
One of the reasons Chile implemented the requirement is that it is a culture in which multiple generations of families live together – something that is much more unusual in the UK.
Mike Ambery, of pension provider Standard Life, said: 'It works favourably in a culture where generations of the same family share housing and economic wealth.
'This enables consideration of intergenerational spending and wealth – in particular to optimise spending and any applicable inheritance tax.'
It is unlikely to be a panacea for the UK's pension problem. Despite its reputation for innovation, Chile has struggled with fundamental questions about how to fund retirements, especially after savers were allowed to raid their pensions during the pandemic to fund day-to-day spending.
Meagre state payouts during the pandemic triggered mass demonstrations in 2019, threatening the political stability of the country. In response, the Chilean government allowed three rounds of withdrawals from pension pots – amounting to 20.6pc of the country's 2020 GDP. The drastic policy, designed to ease immediate financial pressures on families, saw three in 10 deplete their pension accounts entirely.
In Chile, the population eligible for the solidarity pillar payment is expected to double to hit six million by 2050, according to academics Christopher Evans and Samuel Pienknagura.
A glimmer of hope has been found in fundamental reform, on the advice of the OECD. After a decade of gridlock, a landmark bill was passed earlier this year, increasing employer contributions from 1.5pc of salaries to 8.5pc over nine years.
'Major disincentive'
Ms Reeves is no stranger to looking abroad for inspiration. Last year it was reported that the Government had been speaking to Australian pension providers about copying aspects of the country's generous system.
But a system as different as Chile's would be very difficult to replicate in the UK, experts said, not least because our population is three times bigger.
James Jones-Tinsley, pension specialist at consultancy Barnett Waddingham, said: 'Could such a wealth-based proposal ever work in the UK?
'Given that our state pension has been in existence since 1908, and that an 'air of entitlement' to receive it from a specific age, provided the eligibility criteria has been satisfied, is embedded in British culture, it would be a very brave government that would seek to introduce such a sea-change in eligibility.'
He added: 'Such a radical proposal would engender so many questions. What components would dictate an individual's wealth? How wealthy is wealthy?'
Tom Selby, of investment platform AJ Bell, said: 'Administering means-testing systems is notoriously tricky and often ends up costing a significant amount on an ongoing basis.
'In my view, any potential fairness benefits of means-testing are vastly outweighed by the costs of complexity, potentially disincentives to auto-enrolment saving and the innate uncertainty another state pension revolution would create for millions of people.'