Publication Social security 17 June, 2015

How to run a country: pensions

Read the full report  

This week Reform is publishing recommendations for the 2015 Spending Review. Each day we will publish analysis for each of the main areas of public spending.

Pensions policy poses a significant, albeit slow burning, challenge for the new Government. The Department for Work and Pensions estimates 11.9 million people are undersaving for their retirement. Meanwhile demographic shifts will see yearly expenditure on the State Pension and pensioner benefits grow by 1.3 per cent of GDP between 2015-16 and 2064-65. This is bad news for both public finances and the wellbeing of pensioners.

Action is needed, but caution is also called for. The full implications of policies affecting retirees take generations to emerge, people need time to be able to prepare for their futures, and retirement needs can be complex and varied. When navigating these challenges, the Government should be guided by three principles. Pension policy should:

  • Provide a framework for everyone to sustain a healthy level of wellbeing in retirement by alleviating poverty and helping savers meet their aspirations.
  • Extend choice to those who seek it, while recognising varying capabilities and the need to design regulatory frameworks which support decision-making.
  • Create a financially sustainable system that does not undermine the wellbeing of future citizens through the crowding out of other public services or accrual of debt.

The chapter sets out the steps policymakers could take to realise this vision. Specifically, the report argues the Government should:

  • Uprate the State Pension through an Australian-style “relative earnings link”, which increases payments with earnings during normal years but allows temporary flexibility during periods of high inflation.
  • Scrap the Winter Fuel Allowance and free TV licence, with cash support reserved for the most vulnerable pensioners. To combat pensioner loneliness, it should retain free bus passes.
  • Conduct a feasibility study of auto-escalation, as well as evaluate measures to help those marginalised from the auto-enrolment system, such as the self-employed.
  • Accelerate and prioritise the roll out of the Pensions Dashboard.
  • Develop a skills and welfare to work strategy that specifically targets the needs of older workers who want to remain active in the labour market.

An accompanying blog post to the report can be found here.