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

Conclusions
overall reduction in their household income. Our analysis suggests that the
redistributive effect of the changes to state pension income will be somewhat
offset by changes in means-tested pension credit entitlement. For example, while
64% of sample members in the lowest wealth quintile live in households that
would experience a net increase in state pension income, this figure falls to 40%
when we take into account the loss of means-tested pension credit. Conversely,
we find that 62% of those in the richest wealth quintile live in households that
gain in terms of their state pension income and this figure is unchanged when we
take into account means-tested pension credit.
In the long run, the effect of the proposed reforms will be to reduce state pension
income for most people. The reductions will be largest for higher earners.
However, the system will become less expensive to the exchequer, easier to
understand and more transparent.
With lower pension income coming from the state, later cohorts will need to save
more privately for their retirement. Our calculations suggest that someone born
in 1986 who earns at the lower earnings limit (LEL) for 35 years would see their
potential state pension income at SPA reduced from £8,618 per year to £7,629
per year by the proposed single-tier reforms. To make up this deficit, they would
need to save more privately for retirement.
Exactly how current younger people will respond to this policy remains to be
seen. The lower state pension income increases the need to save privately, and
the reduced complexity may also make it easier for people to engage with
decisions about their retirement saving and may help them to make more
appropriate decisions. The government will, however, need to communicate
clearly and honestly with currently younger individuals to ensure they
understand how this policy reform affects them and that they will need to save
privately if they want to achieve more than the level of retirement income
provided by the new single-tier pension.
The lower exchequer cost in the long run suggests that this reform may be
longer-lasting than the many others that have come before. The Office for Budget
Responsibility’s long-run fiscal projections last year suggested that further
reforms would be needed at some point to reduce upward pressure on public
spending (or increase additional tax revenues) in future. To the extent that the
single-tier reforms help to deliver this, they perhaps avoid some other policy that
might also have been costly to these same cohorts.
The single-tier pension system will be easier to understand and more
transparent than the existing system. There will be far fewer parameters for
future governments to tweak if they are searching for short-term savings or
giveaways. However, this is a risk as well as a virtue. Apparently small changes to
the indexation of the single-tier amount could compound over time to imply a
large change in state pension income for later cohorts – just as the decision to
move the basic state pension from earnings to price indexation in 1981 did.
Future governments and voters will need to be cognisant of this fact.
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