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

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