The current generation of pensioners is better off than ever before, and for the first time have incomes higher on average than the rest of the population, the director of the Institute for Fiscal Studies (IFS) Paul Johnson will say in giving the inaugural Pensions Management Institute annual lecture later today (18.30 Tuesday 20 Oct 2015).
Johnson will set out how modelling by IFS researchers suggests that pensioners’ incomes will continue to rise for at least the next decade. However, it is unlikely that later generations will do as well. Future state pensions will be less generous on average, there has been an extraordinary fall in rates of home ownership, and, in the private sector, a collapse in membership of defined benefit occupational pension schemes. Younger generations are also likely bearing some of the cost of these generous occupational pension schemes from which they themselves will never benefit.
Johnson will also use his lecture to outline some policy priorities for making state and private pensions more stable and sustainable, for example ending the so called triple lock on the state pension and bringing stability to the taxation of private pensions.
Drawing on work by IFS researchers, Johnson will show how:
- Pensioners now have higher incomes on average than the rest of the population, once housing costs and family composition are taken into account. Pensioners’ incomes have continued to rise post-recession as the incomes of working-age households have fallen;
- This represents a remarkable transformation, Johnson will say. Just 30 years ago pensioners were are at least three times as likely to be poor as non-pensioners. They are now less likely to be poor;
- A large proportion of those retiring now will actually be better off in retirement than they were on average during their working life.
On state pensions Johnson will suggest that the new single tier pension for those reaching the state pension age on from next April will represent the logical culmination of 30 years of policy aimed at undoing the introduction of the State Earnings Related Pension Scheme (SERPS) in 1978. Johnson says the single tier pension represents a stable basis for future provision but:
- The “triple lock” policy, whereby the pension rises by the higher of inflation (as measured by the consumer prices index (CPI)), earnings growth, and 2.5%, needs to end. At some point it will prove to be prohibitively expensive; the OBR estimates that it will add well over one per cent of national income to pension spending by the middle of this century relative to the cost of earnings indexation. It also adds a bizarre degree of randomness into the future level of state pensions which will depend not on overall increases in prices or earnings but on the timing of those rises;
- Continuing increases in pension age, in order to help drive up the age at which people actually stop work, is likely to be vital to the sustainability of the system.
Johnson says that rather greater change is needed in the private sector to make it work better:
- When most pension income came from state pensions and defined benefit occupational pensions risks of poor investment returns and changing longevity were shared between individuals and generations. The increasing dependence on private defined contribution pensions leaves those least able to bear risk – individual savers – bearing all the risk themselves. With the end of compulsory annuitisation this is also true in retirement. This cannot be optimal. Finding some way to share and socialise risk in pension saving must be a priority;
- To ensure the sustainability of the remaining defined benefit schemes, and help with a more equitable distribution between generations, there is a strong case for moving all defined benefit pensions, both preserved and in payment, to indexation in line with the CPI rather than the now discredited RPI;
- There is an urgent need to bring stability and rationality to the taxation of private pensions. Changes have been made far too frequently, making long-term planning impossible. The changes have themselves had little rationale. The Treasury’s current consultation on tax creates even more uncertainty, but at least gives an opportunity to rationalise the system and put it on a long-term sustainable basis. Its starting point ought to be that providing people with tax relief for pension saving when contributions are made, and charging tax (including National Insurance) on withdrawal, is the efficient, neutral basis for personal taxation.
IFS director Paul Johnson says [Note: quote may not appear in the unscripted lecture]: “We have achieved an astonishing turnaround in the incomes of pensioners over the last three decades, without increasing public spending to levels seen in many other continental European countries. But the longer term future looks very uncertain. Those now in their 20s, 30s and 40s may well end up with lower incomes in retirement than their parents. The focus for policy needs to be on getting private provision right, with more risk sharing, and a rational and stable tax policy.”
Notes to editors
1. The slides for the inaugural Pensions Management Institute annual lecture by the IFS director Paul Johnson are available from Jonathan Wood, IFS press & communications manager, on firstname.lastname@example.org or 020 7291 4818
2. The inaugural lecture will take place at 18.30 on Tuesday 20 October 2015 at JP Morgan Chase, 60 Victoria Embankment, Blackfriars, London. The event is fully booked.