The Institute for Fiscal Studies (IFS) has suggested a new ‘four-point pension guarantee’ to provide greater certainty and confidence over what people can expect to receive from the state pension.
In a report published today (December 13), the IFS suggested a new state pension system designed to provide a basis for security in retirement and ensure the state pension has a sustainable future.
Its four point plan suggested the government make the following changes:
- Once the state pension has reached its target level, increases in the state pension will in the long run keep pace with growth in average earnings, which ensures that pensioners benefit when living standards rise.
- Both before and after the target level is reached, the state pension will continue to increase at least in line with inflation every year.
- The state pension will not be means-tested.
- The state pension age will only rise as longevity at older ages increases, and never by the full amount of that longevity increase.
For the fourth point, the IFS said the government will write to people around their 50th birthday stating what their state pension age is expected to be to increase confidence.
The IFS said government should state what it believes to be an appropriate level for the new state pension relative to average earnings.
It currently stands at 30 per cent of median full-time earnings, which is its highest share since at least 1968.
Having set a target, the government should then legislate a pathway to meet it with a specific timetable.
In choosing the level of the new state pension, the government has to consider the trade-off between a higher income for pensioners and the cost to the public finances.
Heidi Karjalainen, a research economist at the IFS and author of the report, said: “A commitment by the government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise.
“Under our suggested guarantee, they would also be protected from falls in their purchasing power when inflation is high or earnings growth is very weak. In choosing a target, the government would have to balance carefully the benefits of a higher state pension income, and the cost to the public finances of providing the pension.”
The IFS said although the current state pension has many strengths, its pensions review indicates several problems such as no sense of what level the pension will reach or when.
The ‘triple lock’ was introduced from April 6, 2011 and means the basic state pension and single tier state pension increase by the highest of earnings, inflation (CPI) and 2.5 per cent.
Recently, chancellor Jeremy Hunt confirmed the government will “honour its commitment” to the triple lock in full by increasing the new state pension by 8.5 per cent in April.
However, the IFS said it provides neither future pensioners nor government with any certainty regarding the level of the state pension.
Many younger people have little confidence in the continued existence of the pension and decisions over increasing state pension age are uncertain.
Carl Emmerson, deputy director at IFS and another author of the report, said: “The current state pension system, and especially the new state pension, has much to commend it, but a number of challenges remain. In particular, the ageing population leads to uncertainty around the long-term sustainability of the system.
“A new way forward is needed to ensure that people can have confidence and certainty over the state pension as a future source of income to help avoid old-age poverty and provide a solid bedrock on top of which they can build private pension saving.”
