At last, pensions policy is starting to recognise reality
by Dr. Ros Altmann
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The new Government’s policy program has started well, with promises in the Queen’s Speech to make the Basic State Pension more generous and also recommending an increase in the state pension age. Both of these measures are welcome. But they are just a start. We need more reform to get us back on track for a sustainable future. The new Ministerial Team at the DWP has the potential to deliver real, meaningful change and the signs are hopeful so far.
Increasing Basic State Pension is good – but it remains inadequate
By raising the Basic State Pension (BSP) from next year more quickly than previously promised, many pensioners will have extra income each week. This is obviously good, but we will still have just about the lowest state pension in the developed world and pensioners cannot live only on their BSP
If BSP earnings link had been kept, it would now be over £140 a week
The link with average earnings was broken over thirty years ago. If this had not happened, and the Basic State Pension had increased each year in line with earnings, instead of just price inflation, it would now be worth over £140 a week. In other words, the Basic State Pension would have been above the Pension Credit level of £132.60. That would have been far better than the current mass means-testing regime.
Raising state pension age is sensible and recognises demographic reality
Raising the state pension age is long overdue and, given our demographics, if we do not encourage more older people to keep working, we are heading for long-term economic decline and millions of older people living in penury. Just look at the chart below, it shows the startling increase that is about to take place in the growth of the population from 2011 onwards. This is the anniversary of the end of the Second World War and in nine months time, the first baby boomers will hit age 65.
CHART 1: ANNUAL GROWTH RATE OF POPULATION BY AGE GROUP 1941-2051
Growth will be hit if we do not address ‘demographic drag’
If these baby boomers all suddenly stop working and try to live on tiny pensions, the economy will be hit by ‘demographic drag’. Increasing numbers of people will have much less money to spend and this will hurt growth. Economic policy has ignored the demographics in recent years and failed to encourage saving, while
encouraging too much borrowing. We need to redress that balance.
More pension age increases likely to follow
The Chart is a clear indication that we need to raise state pension age much faster than previously planned. Life expectancy has been increasing by 3 months every year for the past few decades, yet pensions policy has failed to recognise this reality. The Government is reviewing the situation and no doubt more increases will come in future. This seems inevitable.
UK pension policy has fallen far behind changes in health, life expectancy and working practices, so that millions of people who have 20 or 30 more years to live and are in pretty good health are about to be thrown out of work, with little money to live on, when they are perfectly capable of staying economically active.
Ending default retirement age also good news
At last, the Government is waking up to the challenge and is raising the state pension age, making the state pension more generous and also ending the default retirement age as soon as possible, to help older people stay at work part-time. Of course, it is very hard for many older workers to find work, but cutting down and job sharing in their existing employment would be a possible option.
What will happen to S2P and Pension Credit?
There is no commitment to raising the State Second Pension more generously or to the uprating for Pension Credit. The new Ministers have not made any decisions on these issues yet, which are other important elements in our complex pensions mess.
Pension Credit is a real problem – undermines private pensions and take up is low
The full BSP is only £97-65 after a full lifetime of contributions, but anyone over age 60 can receive Pension Credit of at least £132-60 if they do not have much other income. Pension Credit is the most damaging aspect of our state pension. Nearly half of pensioners are entitled to this means-tested top up to their state pension, and they can get at least £132-60 a week without ever contributing to National Insurance, but they will lose some or all of any private pensions and savings if they claim. The Pension Credit is horrendously complex, is hugely expensive to administer and many older people, although entitled, do not claim it, which leaves nearly 2 million pensioners in poverty. Pension credit penalises private pensions, so it has made pensions unsuitable for many lower or moderate earners, since nearly half of pensioners will eventually be means-tested in retirement, even on current forecasts. People are often better off putting money into an ISA, which they can spend if they want to, rather than locking their money into a pension and losing some or all of it in the means test.
A good start
So far, so good. Let’s hope that there really will be more changes from the new Government taking us, at last, in the right direction to deal properly with our pensions crisis.
Dr. Ros Altmann