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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6. Wider implications of the proposed<br />
reforms<br />
<strong>The</strong> proposed <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> reform marks the latest, possibly final, step on a<br />
long – and ultimately some<strong>what</strong> circular – journey for state <strong>pension</strong>s in the UK.<br />
<strong>The</strong> <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> would bring back a state <strong>pension</strong> that looks rather like<br />
the system in place before the 1975 Social Secur<strong>it</strong>y Act, although w<strong>it</strong>h more<br />
extensive cred<strong>it</strong>ing for those doing unpaid activ<strong>it</strong>ies.<br />
<strong>The</strong> proposed changes have significant implications for both the UK’s public<br />
finances and for individuals and their finances. In this chapter, we describe how<br />
the latest proposed reforms f<strong>it</strong> into the extensive history of state <strong>pension</strong> reforms<br />
over the last 40 years, and discuss the wider implications of and lessons to be<br />
drawn from the new system for the government and individuals.<br />
6.1 A long and circular road<br />
In 1974, the UK state <strong>pension</strong> system contained a basic state <strong>pension</strong> (BSP),<br />
which was uprated each year in line w<strong>it</strong>h growth in average earnings. People<br />
accrued ent<strong>it</strong>lement to this <strong>pension</strong> if they worked and paid flat-rate NI<br />
contributions; men needed 44 years and women 39 years of contributions to<br />
receive the full BSP. 66<br />
In 1975, the Labour government legislated for a new earnings-related <strong>pension</strong>,<br />
which dramatically increased the <strong>pension</strong> that higher earners, in particular, could<br />
get from the state. From the very start, commentators pointed out that this<br />
system looked unsustainable and that the government did not appear to have<br />
given adequate consideration to the long-run costs (Hemming and Kay, 1982).<br />
<strong>The</strong> last 30 years have been spent – by parties of all pol<strong>it</strong>ical persuasions –<br />
unpicking this policy and reducing the future costs to the taxpayer. At the same<br />
time, the system has been made more generous to those who spend periods in<br />
unpaid activ<strong>it</strong>ies. <strong>The</strong> <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> reform marks perhaps the final logical<br />
step on this journey.<br />
A number of different policy reforms have been attempted over the years to<br />
reduce the overall cost of the UK state <strong>pension</strong> system and to divert more of the<br />
spending towards those w<strong>it</strong>h lower lifetime earnings. Figure 6.1 gives an<br />
indication of the effects of the various policies by showing the <strong>pension</strong> income at<br />
SPA that low- and high-earning men born in 1950 would have expected to get at<br />
certain ages, given the legislation that was in place when they were that age –<br />
assuming that they expected <strong>it</strong> to remain in place. <strong>The</strong> low earner shown is<br />
assumed to have earned fractionally above the lower earnings lim<strong>it</strong> (LEL) for 49<br />
66 As mentioned in Chapter 2, there was also graduated retirement <strong>pension</strong>, which had been<br />
introduced in 1961. Ent<strong>it</strong>lements to this are very low – largely because they have not been fully<br />
uprated to account for price inflation over time.<br />
62<br />
© Inst<strong>it</strong>ute for Fiscal Studies