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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Wider implications<br />
cohort. <strong>The</strong>se trends also <strong>mean</strong> that the potential ent<strong>it</strong>lements of high and low<br />
earners have been converging over time.<br />
<strong>The</strong> <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> proposals are, therefore, potentially the final step in a<br />
tortuous journey back towards a state <strong>pension</strong> system that will look remarkably<br />
similar to the one that was in place in 1974. As suggested by Figure 6.1, had the<br />
link between the BSP and average earnings not been broken in 1981, the BSP<br />
would now be worth around £145 a week – essentially the same level as<br />
suggested for the <strong>single</strong>-<strong>tier</strong> <strong>pension</strong>. Arguably the main reason for breaking the<br />
link w<strong>it</strong>h earnings in 1981, and the subsequent reforms in 1986 and 1995 that<br />
reduced the generos<strong>it</strong>y of SERPS, was to reduce the future costs of state <strong>pension</strong>s,<br />
which had been dramatically increased by the introduction of SERPS in 1975. <strong>The</strong><br />
<strong>single</strong>-<strong>tier</strong> proposals serve to sweep away the remnants of the earnings-related<br />
state <strong>pension</strong> system and restore an earnings-indexed basic level of state <strong>pension</strong><br />
income. <strong>The</strong> one big difference between the <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> and the 1974<br />
system is that the <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> will be essentially universal, w<strong>it</strong>h extensive<br />
cred<strong>it</strong>ing of unpaid activ<strong>it</strong>ies, which was not available in 1974.<br />
6.2 Reducing the long-run costs of state <strong>pension</strong>s<br />
<strong>The</strong> latest long-run public finance forecasts from the Office for Budget<br />
Responsibil<strong>it</strong>y (OBR) suggest that age-related spending will increase significantly<br />
over the next 50 years. One driver of this is the growth in spending on state<br />
<strong>pension</strong>s implied by current policy. <strong>The</strong> Office for Budget Responsibil<strong>it</strong>y (2012)<br />
suggests that spending on state <strong>pension</strong>s will increase from 5.7% of national<br />
income in 2011–12 to 8.3% by 2061–62. 67<br />
As we described in Chapter 5, in the longer run, the proposed <strong>single</strong>-<strong>tier</strong> <strong>pension</strong><br />
reforms imply a reduction in state <strong>pension</strong> income for most people in later<br />
cohorts compared w<strong>it</strong>h <strong>what</strong> they could expect to get under current legislation. It<br />
is therefore not surprising that DWP estimates that these proposals will reduce<br />
future state <strong>pension</strong> spending by 0.4% of national income. 68<br />
<strong>The</strong> OBR’s long-run forecasts suggest that – at some point – add<strong>it</strong>ional measures<br />
to reduce public spending or increase tax revenues will be required to prevent<br />
the upward trends in age-related spending implied by current policy leading to<br />
rising levels of public debt. 69 <strong>The</strong> <strong>single</strong>-<strong>tier</strong> proposals could be considered as<br />
going some way to delivering such an adjustment. <strong>The</strong>refore, to the extent that<br />
the <strong>single</strong>-<strong>tier</strong> proposals provide greater clar<strong>it</strong>y about how this required<br />
adjustment in public policy will be achieved, they might be welcomed by current<br />
younger cohorts even though they lose directly (in terms of their future state<br />
<strong>pension</strong> income) from the changes. <strong>The</strong> proposals will also, no doubt, be<br />
67 <strong>The</strong>se figures assume that the BSP will be triple-locked indefin<strong>it</strong>ely.<br />
68 Department for Work and Pensions, 2013b.<br />
69 See chart 3.8 of Office for Budget Responsibil<strong>it</strong>y (2012).<br />
65