A single-tier pension: what does it really mean? - The Institute For ...

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Wider implications years – between ages 16 and 64. The high earner is assumed to have earned at the upper earnings limit (UEL) for the same 49 years. At the age of 20 (in 1970), assuming these people knew their future earnings trajectories and believed that contemporaneous state pension legislation would continue, both these individuals would have expected to get a state pension income at the age of 65 of £145 per week (in 2013–14 earnings terms) – that is, a full BSP indexed to growth in average earnings. In 1975, when these people were 25, a new Social Security Act was passed, which legislated for the original incarnation of SERPS. This hugely increased the income that the high earner would have expected to receive from the state pension, although it had essentially no effect on the low earner. Figure 6.1. Expected state pension income at SPA based on legislation in place when individuals were at different ages: men born in 1950 Weekly state pension income (£; 2013–14 earnings terms) 370 350 330 310 290 270 250 230 210 190 170 150 130 110 90 70 50 1975 Social Security Act 1981 price indexation of BSP 1986 Social Security Act 1995 Social Security Act 2000 Social Security Act 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 Age Low earner High earner Note: This graph is for men born in 1950, who are assumed to be employed and to be contracted in to the state second-tier pension for all years (where relevant) between ages 16 and 64. The low earner is assumed to earn at fractionally above the LEL, while the high earner is assumed to earn at the UEL. The figure includes all major state pension reforms but excludes minor changes that have happened to uprating in the past. The figure also excludes entitlement to the graduated retirement pension. Source: Authors’ calculations. It quickly became apparent that the costs of the state pension system implied by the 1975 Act were unsustainable. Against this backdrop, the Conservative government in 1981 decided to break the link between the BSP and average earnings and instead uprate using the retail price index. This decision affected both the high and low earners and reduced the amount that each of them would have expected to get from the BSP by £35 a week. Subsequent reforms of SERPS (in 1986 and 1995) reduced the value of SERPS for the high earner by £44 a week in total. Finally, at the age of 50, the introduction of S2P in the 2000 Social Security Act increased the state pension that the low 63
A single-tier pension: what does it really mean? earner would expect to get by £26 per week. For the low earner, this last reform returned their expected pension to about £10 a week below the level that was implied by the pre-1981 earnings-indexed BSP. State pension reforms since 1974 first dramatically increased the amount of state pension that higher earners could receive from the state, then gradually reduced the additional pension available to higher earners. The biggest effect on many, particularly low earners, was the decision to index the basic state pension in line with prices after 1981. This significantly reduced future entitlements. Reforms to the earnings-related element and crediting of unpaid activities from 2000 onwards have benefited lower earners. The combined effect of these reforms means that high earners in earlier cohorts will have received relatively higher state pension entitlements than high earners in later cohorts, while low (or non-) earners in later cohorts have tended to fare better than low (or non-) earners in earlier cohorts. Figure 6.2. State pension income at SPA for example low- and highearning men, by cohort £ per week (2013–14 earnings terms) 350 300 250 200 150 100 50 0 1930 1935 1940 1945 1950 1955 1960 1965 Low earner High earner Note: This graph is for men born in different years, who are assumed to be employed and to be contracted in to the state second-tier pension for all years (where relevant) between ages 16 and 64. The low earner is assumed to earn at fractionally above the LEL, while the high earner is assumed to earn at the UEL. The figure excludes entitlement to the graduated retirement pension. Source: Authors’ calculations. This is illustrated in Figure 6.2, which shows state pension income at SPA for example low- and high-earning men from a number of different cohorts. (These example low and high earners have the same type of career history as the individuals depicted in Figure 6.1.) For low earners, later cohorts will receive more state pension income than earlier cohorts did – with the 1965 cohort expecting to receive £167 a week at SPA under current legislation (in 2013–14 earnings terms), compared with just £101 a week for the 1940 cohort, who reached SPA in 2005. Conversely, higher earners fared better in earlier cohorts, with state pension entitlements peaking (at £300 a week) among the 1935 cohort, who reached SPA in 2000, compared with £265 a week for the 1965 64
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A single-tier pension: what does it
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Published by The Institute for Fisc
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Contents Executive Summary 1 1. Int
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1. Introduction In a White Paper pu
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Page 75 and 76: 7. Conclusions Pensions Bill 2013-1
Page 77 and 78: References Attanasio, O. and Rohwed
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A single-tier pension: what does it really mean? - The Institute For ...

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