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Increasing the state pension year-on-year is ‘not sustainable’ and may risk the future pension pots of working-age Britons, a leading economics think-tank has said.
The Institute for Fiscal Studies said the Government’s triple lock policy – where the state pension is increased annually by the highest of inflation, earnings growth and 2.5 per cent – must be scaled back in future to avoid financial pain for future retirees.
The gap between spending on pensioners and working-age benefits is now at the highest since records began in the 1970s, according to a report by the think-tank.
It added: ‘In the limit, this policy is not sustainable as it implies pensions becoming an ever-increasing share of national income, and it is possible that the population currently of working age will not all end up benefiting in full from the same generosity.’
While real spending per working-age adult rose from £1,200 in the late 1970s to £3,200 in 2010 and then crashed back down to £2,500, pensioner spending has gradually increased over the decades.
The Government’s triple lock policy for pensions may have to be scaled back in future to avoid financial pain for future retirees
The pensioner bill now makes up 5.5 per cent of national income, compared to 4.3 per cent – which the IFS put down to ‘significant cuts to the working-age benefit system, while pensioner benefits were largely protected or increased.’
‘The priority given to transfers made in the working-age portion of life versus those made during retirement is itself an important choice, and has in recent years helped shape the austere context within which working-age transfer policy is made,’ the report added.
In April the government has guaranteed another 10.1 per cent increase in the state pension to match inflation.
The IFS also warned that the increasing number of people in work in Britain – now at almost a record 33million – was mainly down to unemployed people gaining part-time roles.
But the incentive for them to shift to full-time jobs has been weakened over time due to generous in-work benefit payments.
There is a reluctance to move to full-time work, the think tank said, due to in-work benefits – namely, the taper rate – and taxation rates.
In April the government has guaranteed another 10.1 per cent increase in the state pension to match inflation
Reforms have meant that for every extra pound earned, workers would lose up to 58p in taxes or withdrawn benefits – the figure was just 52p 25 years ago.
And while universal credit has been hailed as a means to allow those on benefits to keep more of what they earn, the IFS suggested it has instead increased incentives to do ‘mini jobs’ at low hours.
This has led to a loss in potential tax revenues, hurting the nation’s finances.
A Department for Work and Pensions spokesperson said: ‘We have extended intensive support to almost a quarter of a million claimants in work but on low pay and from September we’ll be rolling out our ramped up In-Work Progression Offer – providing dedicated Work Coach support to a further 500,000 claimants on Universal Credit to help them earn more and advance their careers.’
‘Our network of Jobcentres offers an extensive skills provision through apprenticeships, skills bootcamps as well as the Sector-based Work Academy Programmes (SWAPs) which support claimants to upskill, helping them to enhance their earnings as well as their career prospects.’
