SOCIAL SECURITY BENEFITS/STATE BENEFITS
Synopsis: The DWP has issued some ad hoc research on the impact of the new single tier pension.
The new single tier pension has not been receiving the best of publicity of late. Even the pension’s minister has gone on record (in a BBC Woman’s Hour interview) as saying that ‘…there is so much misconception about this £150 a week’. Earlier this year she had conceded that only 38% of those reaching state pension age (SPA) in 2016/17 would receive the full single tier pension.
In late October the House of Commons Work and Pensions Select Committee announced an inquiry into ‘Understanding the new State Pension’. The Committee said that ‘Concerns have been raised that many of those who will be affected by the changes do not know enough about the changes or exactly what they will mean for their pensions.’
It is perhaps no coincidence that in the Autumn Statement the Chancellor increased the (notional) single tier pension by the full 2.9% implied by the earnings link, whereas previously the theoretical increase had only mirrored the cash amount rather than percentage of the basic state pension rise. A further piece of government-inspired good news for the single tier pension emerged with an ad-hoc DWP paper showing the first 15 years’ impact of the single tier pension.
The paper is effectively an abbreviated update of earlier impact assessments, using 2015/16 earnings figures and the new £155.65 figure for the single tier starting level from next April. It shows that – note the deliberate phraseology – ‘In the first 15 years of the new State Pension system, around three-quarters of people who reach state pension age under the new system will have a notionally higher state pension than under the old system.’
That may not sound at odds with the stories about the proportion of people reaching SPA by 2030 that will not get the full single tier amount, so it is worth understanding what exactly is being measured and the assumptions underlying the DWP’s calculations:
- When the DWP talks about benefits being ‘notionally higher’, it is comparing what would theoretically have been produced under the current system (basic state pension + state second pension) with the outcome under the combination of foundation amount (i.e. benefits up to 2016) plus new system accrual.
- The basis for DWP’s yardstick is average real terms weekly pension over life expectancy and it expresses gains and losses in those terms. The use of life expectancy helps the case for the single tier pension because it is assumed to be triple locked throughout. In contrast the existing system only gives a triple lock to the basic state pension (£36.35 a week less in 2016/17), with additional pensions (S2P, SERPS) CPI-linked.
As a result, it is possible for the new system to deliver a lower initial pension than the current system at SPA, but still produce higher benefits in DWP terms because of the long term impact of superior escalation (see 3. below). Of course, that presumes the triple lock will survive, something which the Government Actuaries’ Department and the Institute of Fiscal Studies have both questioned.
- The underlying economic assumptions are ‘consistent with the latestFiscal Sustainability Report‘ from the Office for Budget Responsibility. These area long term CPI of 2.0%, long term average earnings growth of 4.5% and triple lock pensions growth of 4.9%. The near 3% gap between CPI and the triple lock both explains why using life expectancy helps the single tier numbers and why it is such a costly option.
- The DWP’s figures make no distinction between employed and self-employed, even though the self-employed are automatic winners under the new system because they are excluded from the state second pension. The greater the proportion of self-employed therefore, the more the winners.
- The DWP comparisons ignore the higher NI contributions payable from 2016/17 for those currently contracted out.
The truth which the latest DWP document omits is that the new system will ultimately cut overall government expenditure on pensioner benefits, as the chart on page 19 of the most recent full impact assessment clearly shows.
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