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

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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. 69
References Attanasio, O. and Rohwedder, S. (2003), ‘Pension wealth and household saving: evidence from pension reforms in the United Kingdom’, American Economic Review, vol. 93, pp. 1499–521 Bozio, A., Crawford, R. and Tetlow, G. (2010), ‘The history of state pensions in the UK: 1948 to 2010’, Institute for Fiscal Studies (IFS), Briefing Note no. 105 (http://www.ifs.org.uk/bns/bn105.pdf) Bozio, A., Crawford, R., Emmerson, C. and Tetlow, G. (2010), ‘Retirement outcomes and lifetime earnings: descriptive evidence from linked ELSA–NI data’, Department for Work and Pensions (DWP), Working Paper no. 81 (http://research.dwp.gov.uk/asd/asd5/WP81.pdf) Department for Work and Pensions (2006), Security in Retirement: Towards a New Pensions System, Cm 6841 (http://webarchive.nationalarchives.gov.uk/20100303161939/dwp.gov.uk/poli cy/pensions-reform/security-in-retirement/) Department for Work and Pensions (2011), A State Pension for the 21 st Century, Green Paper, Cm 8053 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/f ile/184899/state-pension-21st-century.pdf.pdf) Department for Work and Pensions (2013a), The Single-Tier Pension: A Simple Foundation for Saving, White Paper, Cm 8528 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/f ile/181229/single-tier-pension.pdf) Department for Work and Pensions (2013b), Pensions Bill: Impact Assessment (https://www.gov.uk/government/publications/pensions-bill-impactassessment) Department for Work and Pensions (2013c), ‘National Insurance credits and the single-tier pension’ (https://www.gov.uk/government/uploads/system/uploads/attachment_data/f ile/209123/national-insurance-single-tier-note.pdf) Department for Work and Pensions (2013d), ‘State pension entitlements derived from a current or former spouse’s or civil partner’s National Insurance contributions’ (https://www.gov.uk/government/uploads/system/uploads/attachment_data/f ile/181235/derived-inherited-entitlement.pdf) Department for Work and Pensions (2013e), ‘The single-tier transition and contracting out’ (https://www.gov.uk/government/uploads/system/uploads/attachment_data/f ile/210299/single-tier-valuation-contracting-out.pdf) 70 © Institute for Fiscal Studies
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A single-tier pension: what does it
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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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