Employees in their twenties and thirties lose out in single-tier pension reforms, says Aleks Collingwood.
From 2016 the existing two-part state pension system is to be replaced by a new single-tier system. The new state pension is expected to be around £146 per week; restoring the state pension to the same level (relative to average earnings) it was in the early 1970s.
JRF and the Institute of Fiscal Studies (IFS) are looking at a programme of work on the Outlook for Living Standards and Poverty in Later Life. A new JRF-co-funded report looks at how the proposed pension reforms affect different types of people and how drastically different the short-term and long-term effects are.
In the short term
Only 17 per cent of those close to the state pension age will be entitled to a state pension worth the same as the single-tier amount. 23 per cent would get a state pension worth more than that, while 61 per cent would receive less than £146 per week.
The main reason so many people will have a single-tier pension worth less than the full amount is that so many chose to take advantage of the option to pay lower National Insurance contributions in return for not building up entitlement to the second-tier state pension (known as ‘contracting out’) .
The biggest winners are those who have spent long periods out of work or doing low-paid work – a group which disproportionately comprises women – and the long-term self-employed.
In the long term
For those born after the mid-1980s, the reforms mean a reduction in state pension income for almost everyone. The only major exception are the long-term self-employed. These reductions will be larger for the higher earners. The reduction in generosity in the longer term will, however, reduce the cost of the system as a whole and help meet the public finances costs of an ageing population. This means the reforms will decrease the need for future policy to reduce spending or increase taxes.
Actions to take
A key message from the IFS analysis is that whilst these reforms should make it easier for people to predict how much state pension they will get, younger generations will receive less. They will need to start saving privately if they want an adequate income in their retirement. This requires a shift in attitudes and behaviours about saving – many people already underestimate the income they will need in retirement and how long they will live, also overestimating what the state will provide.
It is vital that the Government communicates clearly and honestly with the public to ensure they understand the need to save privately if they want to achieve more than the level of retirement income provided by the new single-tier pension. A simplified pension system will help with that, but it remains to be seen whether reduced complexity makes it any easier for people to make good saving decisions.
Read more about JRF’s work on poverty in the UK and ageing.
