Why the Government will determine future levels of pensioner poverty

Pensioner poverty has been falling over the last three decades in the UK. At its peak in 1989, 39% of pensioners had incomes below the relative poverty line of 60% of median income, after housing costs (AHC).

The Government’s most recent figures suggest that in 2009/10 around 2.1 million pensioners were living in households with household income below the relative poverty line of 60% of median income, after housing costs (AHC). This represented 16% of a total of 11.5 million pensioners living in the UK.

On 11 July 2011, the Pensions Policy Institute (PPI) launched a new report, The implications of Government policy for future levels of pensioner poverty, which was commissioned by Age UK.

The report projects future levels of pensioner poverty under the current state pension system and under a range of alternative Government policies. One of the key findings of the report is that decisions on the state pension and benefits paid to pensioners will determine future levels of pensioner poverty.

If the Government was to continue with current policy – which is indexing the Guarantee Credit in line with the growth in average earnings – the percentage of pensioners living in households with household income below 60% of median income is expected to decrease to around 11% of pensioners, from around 15% in 2011.

Instead, the Government could decide to uprate the Guarantee Credit with the “triple lock”. This involves taking the higher of three options: growth of average earnings, growth in the Consumer Prices Index or 2.5%. This is expected to result in the percentage of pensioners living in households with household income below 60% of median income to decrease to around 9%. By contrast, indexing the Guarantee Credit to growth in the CPI would increase pensioner relative poverty to around 19%.

The Government has recently been considering more radical reforms to the pension system. Introducing a single-tier pension, as suggested in the recent Green paper, would help reduce pensioner poverty in the long term. A single-tier pension of £140 per week in 2016 for new pensioners only is expected to reduce pensioner relative poverty to around 9% of pensioners by 2025.

However, introducing a single-tier pension for all pensioners is projected to have a larger impact. This policy would reduce the percentage of pensioners living in households with household income below 60% of median income to around 7%.

In all of these options, there is a trade-off between reducing pensioner poverty and Government spending.  While the Government’s single-tier pension for future pensioners does manage to reduce pensioner poverty without increasing spending, all of the other policy options that reduce poverty increase spending (see the table below). What’s more, options that cut spending increase poverty.

So any future Government policy will need to assess the trade-off between poverty reduction and cost to Government.  The research also shows that future decisions on how to index the Guarantee Credit and other benefits may have a significant impact on future pensioner poverty levels.

Percentage of pensioners living in households with household income below 60% of median income,  after housing costs

(UK)

Government Spending on State Pensions and Benefits

(% GDP)

 

2011

 

2017

 

2025

 

2025

Current Policy – BSP triple-locked, S2P flat-rate mid 2030s, Guarantee Credit indexed to earnings

15%

14%

11%

5.7%

1.        As current policy but Guarantee Credit indexed to triple-lock, instead of earnings from 2012

15%

14%

9%

5.8%

2. As current policy but Guarantee Credit indexed to CPI, instead of earnings from 2012

15%

18%

19%

5.4%

3. As current policy but Winter Fuel Payments re-instated to 2010 level and indexed to triple-lock.

15%

14%

10%

5.8%

4. Single-tier pension as in Green Paper introduced for future pensioners only from 2016

15%

14%

10%

5.7%

5. Single-tier pension introduced for all pensioners (current and future) from 2016

15%

9%

7%

5.9%

6. Single-tier pension for future pensioners only and Guarantee Credit indexed to “triple-lock” instead of earnings from 2012

15%

13%

8%

5.8%

One response to “Why the Government will determine future levels of pensioner poverty

  1. M Birtwhistle

    How will these proposals affect pensioners who have only a basic State Pension and small Industrial Pension, and have savings just above the Benefits level so can’t claim Pension Credit or benefits? Even now this is below the poverty line. Should pensioners in this position spend up and claim benefits??

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