New guarantees needed for long-term sustainability of state pension – IFS
A report led by the IFS, in partnership with the abrdn Financial Fairness Trust, suggested a new way forward for state pension increases.
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Your support makes all the difference.A new guarantee should be set for the state pension, linked to earnings, according to the Institute for Fiscal Studies (IFS), which said there is currently no sense of what level the pension will reach or when.
Under current “triple lock” arrangements, the state pension normally increases each April in line with the rise in inflation, earnings or 2.5% – whichever is higher.
But a new report led by the IFS, in partnership with the abrdn Financial Fairness Trust, suggested a new way forward, to help ensure the state pension has a sustainable long-term future.
A commitment by the Government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise
As has happened with the National Living Wage, the Government should state what it believes to be an appropriate level for the new state pension relative to average earnings, the IFS said.
It currently stands at 30% of median full-time earnings, which is its highest share since at least 1968, though it remains less generous than state pensions provided in many other advanced economies that have much more limited provision of private pensions, according to the research.
Having set a target, the Government should then legislate a pathway to meet it with a specific timetable, the report argued.
In choosing the level of the new state pension, the Government should consider the trade-off between a higher income for pensioners and the cost to the public finances.
A new way forward is needed to ensure that people can have confidence and certainty over the state pension as a future source of income to help avoid old-age poverty and provide a solid bedrock on top of which they can build private pension saving
The Pensions Review said there is currently no sense of what level the pension will reach or when – and the triple lock provides neither future pensioners nor the Government with any certainty regarding the level of the state pension.
Many younger people have little confidence in the continued existence of the pension and decisions over increasing state pension age are uncertain, the IFS argued.
The review suggests introducing certain guarantees, including that once the state pension has reached its target level, increases in the state pension will in the long run keep pace with growth in average earnings, ensuring that pensioners benefit when living standards rise.
Both before and after the target level is reached, the state pension should continue to increase at least in line with inflation every year, the report said.
The state pension is a fundamental part of our social contract with Government. We all want to feel confident it is secure
The state pension age should only rise as longevity at older ages increases, and never by the full amount of that longevity increase, researchers said.
To increase confidence and understanding, the Government should write to people around their 50th birthday, stating what their state pension age is expected to be, the IFS said, adding that their state pension age would then be fully guaranteed 10 years before they reach it.
If the Government wants to rein in state pension spending then relying only on raising the state pension age would hit those with lower life expectancy, such as poorer people, harder, the report argued.
Researchers said the triple lock is of more benefit to those who have higher life expectancy, such as richer people.
Heidi Karjalainen, a research economist at the IFS and author of the report, said: “A commitment by the Government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise.”
The IFS report is a major contribution to the debate but what we need now is a broader framework for pension adequacy, setting out the level of retirement income people may get from both the state pension and workplace pension saving
Carl Emmerson, deputy director at the IFS and another author of the report, said: “A new way forward is needed to ensure that people can have confidence and certainty over the state pension as a future source of income to help avoid old-age poverty and provide a solid bedrock on top of which they can build private pension saving.”
Mubin Haq, chief executive of abrdn Financial Fairness Trust, said: “The state pension is a fundamental part of our social contract with Government. We all want to feel confident it is secure.
“However, without assurances about its future, Government risks undermining the public’s trust in its sustainability.
“The Government made a bold decision to link the National Living Wage to earnings which has cemented support for this policy. A similar measure is now needed for the state pension to deliver the financial security and living standards we all need in retirement.”
Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said: “The IFS report is a major contribution to the debate but what we need now is a broader framework for pension adequacy, setting out the level of retirement income people may get from both the state pension and workplace pension saving.”
A Department for Work and Pensions (DWP) spokesperson said: “We want to ensure the state pension remains the foundation of income in retirement for future generations in a way that it is sustainable and fair.
“Thanks to our triple lock promise, the full rate of the new state pension will rise to over £11,500 a year, and there are currently 200,000 fewer pensioners in absolute poverty than in 2009/10.
“Our recent state pension age review concluded that a universal state pension age remained the best system, providing simplicity and clarity for people, and we also remain committed to the principle of providing 10 years notice of changes to state pension age, enabling people to plan effectively for retirement.”