A single-tier pension: what does it really mean? - The Institute For ...
A single-tier pension: what does it really mean? - The Institute For ...
A single-tier pension: what does it really mean? - The Institute For ...
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Long-run effect on <strong>pension</strong>er incomes<br />
the weekly income he would expect to receive from age 85 onwards would be<br />
higher under the proposed <strong>single</strong>-<strong>tier</strong> system than under the current system.<br />
If Jeff instead had 49 years of contributions, his state <strong>pension</strong> income under the<br />
proposed system would not exceed that under the current system until he was<br />
aged 97. (<strong>For</strong> a high earner, these cross-over points would happen even later – at<br />
ages 96 and 107, respectively – as shown in Figure A.2 in Appendix A. 54)<br />
Taking the sum of <strong>pension</strong> income across Jeff’s whole retirement under the two<br />
systems, and discounting future <strong>pension</strong> income at an appropriate rate, we find<br />
that he would have to live to beyond age 105 to be financially better off under the<br />
proposed system than under the current rules. If he had 49 years of contributions<br />
instead, he would have to live to an implausibly old age in order to be financially<br />
better off under the proposed system than under the current one. 55,56,57<br />
Although we have focused here on presenting figures for some example<br />
individuals from one specific cohort, the same inferences apply to everyone who<br />
expects to have at least 31 years from 2002–03 onwards in which they will<br />
engage in activ<strong>it</strong>ies that are cred<strong>it</strong>able towards both BSP and S2P under the<br />
current system. 58 As described in Table 2.1, these activ<strong>it</strong>ies include earning above<br />
the LEL, caring for a child aged under 12, caring for a sick or disabled adult for at<br />
least 20 hours a week and, under some cond<strong>it</strong>ions, receiving certain incapac<strong>it</strong>yrelated<br />
benef<strong>it</strong>s.<br />
54 http://www.ifs.org.uk/docs/report_<strong>single</strong>-<strong>tier</strong>_<strong>pension</strong>_appendices.pdf.<br />
55 All these figures are calculated applying a 3% per year discount rate to real future <strong>pension</strong><br />
income (deflated by CPI inflation). Using a higher discount rate would increase the age to which<br />
one would have to live in order to be financially better off under the proposed system; using a<br />
lower discount rate would reduce the age.<br />
56 <strong>The</strong> factor driving this difference is the amount of someone’s current <strong>pension</strong> ent<strong>it</strong>lement that<br />
is uprated w<strong>it</strong>h prices (their S2P ent<strong>it</strong>lement) compared w<strong>it</strong>h the corresponding value of the<br />
<strong>single</strong>-<strong>tier</strong> <strong>pension</strong> (i.e. STP ent<strong>it</strong>lement minus BSP ent<strong>it</strong>lement) that is uprated w<strong>it</strong>h average<br />
earnings. <strong>The</strong> higher this proportion is, the longer <strong>it</strong> takes for ent<strong>it</strong>lement under the current<br />
system to sink below that of the <strong>single</strong>-<strong>tier</strong> <strong>pension</strong>. Both younger cohorts and individuals w<strong>it</strong>h<br />
fewer than 35 years of ent<strong>it</strong>lement face a higher proportion of S2P ent<strong>it</strong>lement to the excess of<br />
STP ent<strong>it</strong>lement over BSP ent<strong>it</strong>lement, and so they have to live to beyond 105 years for the<br />
proposed system to be more value to them than the current system.<br />
57 Under our assumptions, w<strong>it</strong>h 49 years of contributions, Jeff would have to live to 139 years old<br />
in order to be financially better off under the proposed policy.<br />
58 This defin<strong>it</strong>ion of the long run excludes those who have contracted out in the past. In some<br />
sense, individuals who contracted out prior to implementation will always be affected by the<br />
current <strong>pension</strong> system, as they will retain <strong>pension</strong> rights in their private <strong>pension</strong> that will not<br />
necessarily compare w<strong>it</strong>h the accrued rights of an (otherwise-identical) contracted-in individual.<br />
One should not compare ‘long-run’ outcomes for those who contracted out under the current<br />
system but who will reach SPA under the <strong>single</strong>-<strong>tier</strong> system w<strong>it</strong>h the ‘long-run’ outcomes for<br />
contracted-in individuals; for those who have contracted out, the true long-run comparison to<br />
make is w<strong>it</strong>h those who reach 16 in 2016 and beyond.<br />
53