Supplementary memorandum submitted by
PricewaterhouseCoopers (PC 06A)
ELIGIBILITY FOR
THE PENSION
CREDIT
1. The Committee asked if we could provide
estimates of the percentage of the total pensioner population
that would be eligible for the pension credit under the DWP's
Policy Scenario one (ie with the MIG indexed to earnings and the
lower income threshold for the savings credit indexed to prices)
in 2025 and 2050. Our model estimates, which are subject to significant
uncertainties given the long timescales involved, suggest the
following eligibility levels:
— 2025: around 60 per cent of pensioner
households.
— 2050: around 65-70 per cent of pensioner
households.
2. Within these totals, we would expect
that eligibility for the pension credit would be higher for single
pensioners than for pensioner couples and would tend to rise with
age. For example, for single pensioners over 75, our model suggests
that around 75-80 per cent could be eligible for the pension credit
by 2050 in DWP Policy Scenario 1.
LONG-TERM
COST OF
THE GOVERNMENT'S
STATE PENSIONS
STRATEGY
3. The DWP paper, "The pension credit:
long-term projections" (January 2002), concludes that "Taking
the EPC projections as a baseline, under the high cost Pension
Credit scenario, the percentage of GDP spent on pensions in the
UK would remain broadly around its current level in the long-term"
(paragraph 17, p 8). This is because the 1.3 per cent of GDP projected
incremental cost of the pension credit reform package by 2050
(in Policy Scenario one with 100 per cent take-up) is largely
offset by the projected fall in other UK state pension spending
from 5.5 per cent of GDP in 2000 to 4.4 per cent of GDP in 2050,
as set out in the EPC report.
4. The European Commission Economic Policy
Committee (EPC) projections referred to were taken from an HM
Treasury (HMT) paper,[54]
prepared for the EPC based on certain agreed macroeconomic and
demographic assumptions, based on the legislated state pension
regime in each country in Summer 2000. As this Treasury paper
makes clear, however:
— "state pension spending"
was defined as total National Insurance Fund (NIF) spending, plus
spending on the MIG; however, total NIF spending includes non-pension
items such as incapacity benefit and the jobseekers' allowance;
as the Treasury paper notes (p 27), these non-pension items are
projected to fall particularly rapidly in the long run, accounting
for around half of the 1.1 per cent fall in total UK "state
pension" spending quoted in the EPC report to which the DWP
paper refers; the projected fall in state pension spending alone
is therefore only around 0.6 per cent of GDP between 2000 and
2050; and
— in addition, the EPC-HMT figures
did not include the significant increases in the basic state pension
and the MIG announced in the November 2000 Pre-Budget Report (totalling
around £2.6 billion in a full year); as such, using the EPC-HMT
figures as a baseline underestimates total state pension spending
by around 0.3 per cent of GDP from 2003 onwards, since these BSP-MIG
increases would be expected to persist over time.
5. If we adjust the EPC-HMT baseline figures
for these two effects, we find that the actual projected long-term
decrease in UK state pension spending, excluding the pension credit
reform package, would only be around 0.3 per cent of GDP between
2000 and 2050. After adding the incremental cost of the pension
credit reform package of around 1.3 per cent of GDP in Policy
Scenario one, this leaves total state pension spending rising
by around 1 per cent of GDP between 2000 and 2050, once the EPC/HMT
baseline is defined on a more appropriate basis. This 1 per cent
of GDP increase is similar to estimates for the base case Government
policy option contained in the PwC modelling paper commissioned
by IPPR.[55]
AFFORDABILITY OF
IPPR STATE PENSIONS
POLICY PROPOSALS
6. PricewaterhouseCoopers was responsible
for modelling the costs of the pensions policy options considered
by IPPR in their recent report.[56]
We would note that:
— our estimates suggest that the IPPR
proposals would have broadly similar long-term costs to the Government's
proposed regime with the pension credit, assuming that DWP Policy
Scenario one applies; in both cases, total spending on state pensions
and related benefits and rebates would rise by around 1 per cent
of GDP between 2000 and 2050;
— as discussed above, our estimates
of costs of the Government's proposed regime under Policy Scenario
one are also similar to those published by the DWP, using an adjusted
EPC/HMT baseline; and
— if the Government's proposals (under
Policy Scenario one) are affordable in the long run as the Government
has argued, then it follows from our analysis that the IPPR's
proposals should also be affordable.
7. We note also that our modelling of the
IPPR proposal is relatively conservative in that it does not allow
for the potential increase in income tax revenue due to higher
basic state pension payments relative to the Government policy
option.[57]
We estimate that these additional revenues in the IPPR option
might, on plausible assumptions,[58]
rise steadily from around 0.1 per cent of GDP per annum in 2010
to around 0.3 per cent of GDP per annum by 2050.
John Hawksworth
Head of Macroeconomics
7 March 2002
54 "Country fiche on pensions projections, UK,
Draft 17 October 2001" as published on the European Commission
website together with the October 2001 version of the EPC report.
The paper states that the social security spending estimates were
based on information from the DSS (as was) and the GAD. Back
55
"UK state pensions policy at the crossroads: a review of
the potential long-term costs and benefits of alternative options"
(PwC, February 2002). An advance copy of this paper was sent to
the Committee for reference on 11 February. As discussed in the
Annex to that paper, total pensions spending definitions are not
entirely comparable with the DWP paper, but the broad trends over
time in total pension spending are broadly comparable. Any such
long-term projections are, of course, subject to many uncertainties. Back
56
"A New Contract for Retirement" (IPPR, March 2002). Back
57
Note that other differences between the two options would largely
affect non-taxable income. Back
58
Specifically, we assume here that 30 per cent of the additional
basic state pension payments in the IPPR option would be taxable
at an average income tax rate of, say, 25 per cent for the pensioners
concerned. These assumptions are subject to significant uncertainty,
but they illustrate the broad order of magnitude of this effect. Back
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