What is the future of the state pension?by Paul Johnson / September 17, 2014 / Leave a comment
The current government has delivered or is planning radical changes to the delivery of education, health and, through its planned “universal credit,” working-age social security. On pensions, that other great pillar of the welfare state, it has shown less short term radicalism but perhaps just as much appetite for long term change.
That short-term conservatism is in fact one reason why the scale of fiscal austerity faced by most elements of public spending has been quite so severe. The section of the population that is aged 65 and over is currently growing very fast. There will be two million more people in that age group in 2020 than in 2010. Population ageing is well and truly with us.
That swift rise in the number of pensioners has been accompanied by almost complete protection of their benefits. The state pension is triple locked–—rising by the fastest of CPI inflation, earnings growth, or 2.5 per cent. Other benefits for pensioners have been largely protected, while benefits and tax credits for those of working age have already been cut by £18bn, with more to come.
This protection of current pensioners, expensive though it is, is no doubt electorally savvy. It protects a group with legitimate expectations and less chance than younger people to replace lost income through additional work. But it may also reflect a slightly outdated notion of the economic position of pensioners.
Just 30 years ago rates of income-poverty among pensioners were much higher than those among the working-age population. So successful have we been in turning that round that today, for the first time, average pensioner incomes (after housing costs are taken into account) are higher than the average for the population as a whole. And poverty rates among pensioners are lower than those for working-age people. Recent work at the Institute for Fiscal Studies suggests that the majority of those reaching state pension age at the moment will be better off in retirement than they were on average during their working lives.
This astonishing turnaround has been made possible by a combination of more generous state provision and an occupational pension system from which many retirees have been substantial beneficiaries. This generation has also benefited from high levels of home ownership and swiftly growing property values.
The future, though, may look less rosy. Future generations will not benefit from the same generous occupational pension schemes. And it is on…