Lilley looks to slash costs of welfare state

THE LINK between pensions and inflation could be broken, more benefits could be targeted, and more inducements could be offered to persuade people to opt out of the state pension under wide-ranging plans being studied by ministers to reduce the cost of the welfare state.

Peter Lilley, Secretary of State for Social Security, has ordered a fundamental departmental review. 'Benefits covered by manifesto commitments will have to be for the next Parliament. But we are looking at everything,' said a ministerial source.

The targeting of child benefit and state pension increases is being considered, in spite of clear manifesto commitments. Ministers have ruled out 'workfare' - requiring the unemployed to work for their benefits - as too expensive.

But they are considering a cheaper option of asking them to volunteer to help with caring for the elderly at home as part of the changes to care in the community policy.

Mr Lilley's priority will be legislation to equalise the retirement age at 65 for men and women, following a European Court judgment that the 60 limit for women was discriminatory. That will produce a substantial saving, but ministers are searching for huge cuts in welfare spending for the turn of the century.

Mr Lilley, a Thatcherite, was prevented by the Prime Minister from offering radical cuts in his pounds 70bn social security budget before the Autumn Statement. But he said on Channel 4's A Week in Politics on Saturday: 'We have taken small steps and we will take big steps.'

He said there was a 'three-pronged attack: to focus more money on the needy through the income support system; to freeze basic pensions in real terms; to encourage more private pensions, and people to opt out of state earnings-related benefits.'

The up-rating of pensions in line with inflation was covered by the Tory 1992 manifesto which said: 'We will continue to protect its value against prices.' But with inflation falling to near zero, that commitment could be abandoned by the next election.

To encourage more to opt out of Serps, Mr Lilley is studying proposals to reduce National Insurance contributions for people taking out private pensions.

A founder-member of the radical right-wing No Turning Back Group, Mr Lilley was impressed by a Fabian pamphlet by Frank Field, Labour chairman of the Commons select committee on social security, calling for a pensions revolution.

Arguing that the welfare state should be reformed to lock people into wealth rather than poverty traps, Mr Field said: 'In the scenario I describe, it would be legitimate to question whether, each year, the entire pensioner population should have their old age pension upgraded in line with prices.'

Ministers are studying a poverty trap caused by the system under which home owners can get help with mortgages if they become unemployed, but not if they take work on low wages. 'Providing mortgage support would be too expensive, but we are looking at the anomalies,' said a source.

'Most people realise that you cannot allow monoliths to go unchallenged. We are now actively looking at the monolith of the welfare state, because we have to,' the source added.