Select Committee on Work and Pensions Minutes of Evidence

Supplementary memorandum submitted by the Institute for Fiscal Studies (PC 23A)


  Forecasting the numbers of pensioners on the Pension Credit in the future is difficult as it depends on so many things. Crucially important factors include:

    —  Demographics—birth, death and migration rates determining how many pensioners there are at any one time.

    —  Pension coverage—trends in: the proportion of pensioners with occupational private pensions, the number of working years during which pensioners were building up pension rights, and the generosity of pensions in relation to final salaries.

    —  Changes in the wage distribution—differential growth in the earnings of the rich and poor which can feed through to differential growth in their pension rights.

  Predictions of how these factors will develop in the distant future are time-consuming to produce and are unlikely to be accurate. On these grounds, we have not attempted our own estimates of each of these factors, but have instead assumed that they remain constant over time. Where future estimates are available (as in the case of demographics, where we have a robust prediction that the number of pensioners will rise) they can be used to colour interpretation of our results. Where such estimates are not available, or not considered reliable, they should be seen as reducing the accuracy of our estimates.

  To estimate the proportion of adults over 65 on Pension Credit in 2025 and 2050 we have assumed the following (in line with scenario one in DWP(2001) The Pension Credit: long-term projections):

    —  The basic state pension and the savings credit threshold (and all other state benefits) increases in line with price inflation only.

    —  The Pension Credit Guarantee (the Minimum Income Guarantee) rises in line with real earnings growth, assumed to be 2 per cent per annum. This implies that the real value of the Pension Credit guarantee for a single person will be £152 in 2025 and £237 in 2050.

  We went on to apply these indexed benefit systems to our data, the 1998-99 Family Resources Survey. But it is plainly unrealistic to assume that pensioners' private incomes will not grow at all, so before we did so we had to adjust these. We assumed that all the incomes that pensioners receive from sources other than benefits rise in line with 2 per cent real earnings growth. This crude assumption will approximate the truth if pensioners' private incomes relate closely to their earnings over their working life and if demographics, patterns of pension coverage and the wage distribution are constant over time.

  This methodology produces the following estimates:

    —  52 per cent of adults aged 65 or over would be (or have partners who are) eligible for the Pension Credit if it were introduced today.

    —  In 2025 this rises to 73 per cent.

    —  By 2050 it rises again to 82 per cent.

  As we have stressed, these figures should be treated with considerable caution as they fail to incorporate so many things that could prove important. For example, if the Government succeeded in persuading middle-income individuals to save more privately for their retirement during their working life than it might be that this will be sufficient to give significant numbers sufficient incomes to escape the means-tested benefit system. For such reasons we would stress that our numbers are projections under very specific assumptions—not forecasts or predictions.

  Nonetheless, the figures reflect an important feature of the dynamics of the proposed system—the rapid rise in the income required to exhaust pension credit entitlement. This arises because if the basic pension is frozen in real terms, while the Pension Credit guarantee rises with earnings then the maximum value of the benefit to someone with a full pension (ie the gap between the pension and the guarantee) must rise much faster than earnings. As the income required to exhaust Pension Credit entitlement relates closely to this maximum entitlement, it too rises faster than earnings. Consequently, where all else is equal, people on higher private incomes are brought into the Pension Credit system over time.

Tom Clark

Senior Research Economist

March 2002

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