Why be squeamish about pension cuts?

Some pensioners are poor. But lots of people are poor. Pensioners, though, have big political advantages: they vote, and are perceived to have "paid in all their lives". Politicians meddle with pensioners' income at their peril.

How else can we explain that even in the most austere budget for a generation, the basic pension will now increase in line with earnings, inflation, or two and a half per cent, whichever is highest. And even the richest pensioners get to keep their winter fuel allowance, their free bus passes, and free prescriptions.

And yet it is on this last issue that Simon Hughes, deputy leader of the Liberal Democrats and "conscience of the party", is taking a stand. Hints that the winter fuel allowance might be taken away from the richest pensioners have led him to talk of an end to coalition. Almost every commentator believes winter fuel allowances are bad policy, expensive to administer, and targeted neither at those who are poor, nor those with high energy bills.

The coalition did announce one big pension cost-cutting measure: all public sector pensions will rise with the consumer price index, not the retail price index, which means by about half a per cent less per year, on average. The average public sector pensioner will receive about ten per cent less over their retirement, with police and firefighters affected most. Against this, some of them will get much of it back in more generous means-tested pension credit.

This is a big change, and yet as an apparent technicality it has aroused little comment. Pensioners probably won’t notice in the short run: if next year's pension goes up by slightly less than it otherwise would have done, and the basic pension by more than expected, it is difficult to imagine protest marches in the streets.

Nevertheless, increasing the pension age for public sector workers is the better policy. By increasing the general state pension retirement age to 66, and leaving the public sector worker pension age at 60 unhelpfully increases a sense of “them and us”. Second, although increasing the retirement age and changing indexation rules can both cut government expenditure, raising the retirement age also raises national income and tax revenues.

Politically, it might be harder to require public sector workers to work longer than to change their indexation rules, and in the short run, a technical change might seem to be good politics. But think back to 1997, when the newly elected Gordon Brown changed advanced corporation tax. At the time, the exact details were hard to follow. But over the next 13 years, “Gordon’s pension grab” became firmly entrenched in the narrative of New Labour’s time in office.

The coalition needs to take care: just because people don't understand the change in the short run does not mean that they won't blame you in the long run.

Tim Leunig teaches at the LSE