The Truth About The State Pension

jamesd

Pobby wrote: »

Hang on, it was Thatcher who cut the links to earnings and now the Tories are saying they are going to restore it? How much will the cost be?

marklv wrote: »

Overall cost neutral I would think, as the retirement age is going up to 66, then 67, then 68. In the short term the additional costs will be minimal; in the very long term it could be quite costly, but in that case they will just move the state retirement age up until it becomes little more than cost neutral.

marklv wrote: »

Maybe, but so what? It's time we all faced the truth and accepted that NI contributions need to rise considerably.

Well, that's progress: acceptance that it is not cost neutral and that all the increase in age does is keep the percentage of life in retirement the same.

Now, if you look at Figure Ex 5 on page 17 of the executive summary of the Second Report of the Pensions Commission you'll see a nice graph that shows that keeping the state pension age at 65 and index-linking with inflation rather than wages the percentage of gross domestic product spend on pension benefits would rise from about 6.2% now to about 7.6% in 2050 (green line). Avoiding that 23% increase in taxation needed to fund the benefits paid to pensioners (including state pensions) is what the increase in state pension age does.

That same figure also shows that index-linking would require about 7.8% of GDP by 2050 even with the state retirement age increased to 68 (red line). That's a 26% increase in tax spending. Trying to do it all via taxes would take increasing the tax spending on pensioners by 2.5 times (250%), to 15.6% of GDP.

If you move on to page 19 you'll see how the Pensions Commission suggested income should be split between the various ways of paying it. Also of interest there is that the basic and additional state pensions are only expected to provide the first 31% of average earnings when the total target is over 60%. The NPSS money purchase pension system or private alternatives is expected to provide the remainder. And this is even after increasing tax spending by 26%.

Now, the reason I'm asking you to look at this is in part that the current government has been implementing these recommendations, so if you read about them you'll see the cost implications and avoid arguing for things that have already been started. It'll also give you some chance to make credible arguments that aren't trivial to discredit by pointing to the obvious sources of information.

jamesd

Now, if you move on to page 29 and Figure Ex 9 you can see the retirement ages someone would need (before the changes that have been implemented) to index-link their state pension with earnings. As you can see that would take retiring at age 79 (follow the gray shaded boxes). This is using the existing ability someone has to increase their state pensions by 10.4% for each year they delay taking them.

As you can see there, people already have the option to retire later and increase their state pensions and today could choose to do that and get the same effect as if Thatcher's Conservative government hadn't changed from earnings to RPI linking.

Today, even ignoring that desire, with normal life expectancies, it's optimal to delay taking the state pensions by from three to five years because that increases the amount you get from the state over your life. One way to fund this is to use the lump sum from a personal or work pension.

jamesd

While you post about increasing the state pensions age, do you realise that this takes more of their retirement years from poor workers than well off ones and more from men than from women?

Differences in life expectancy between socio-economic classes: possible responses starting on page 338 of the Second Report of the Pensions Commission covers this issue. Figure 1.41 on page 92 of in Chapter 1 has a graph that shows how the life expectancy after age 65 varies based on socio-economic class.

The key message there is that male labourers can expect to live 13 years beyond age 65 while for doctors it's 18 years. So if you propose increasing retirement age by four years to 69 you're proposing taking almost a third of their retirement from a labourer (30.8%) but only a fifth (22%) from a doctor.

Women can be expected to live around three years longer than men so you'd also be proposing taking more of their retirement from men than from women. To even make the two about the same proportion of adult life women would need to have a state retirement age around two years later than men.

roddydogs

jamesd wrote: »

Now, if you move on to page 29 and Figure Ex 9 you can see the retirement ages someone would need (before the changes that have been implemented) to index-link their state pension with earnings. As you can see that would take retiring at age 79 (follow the gray shaded boxes). This is using the existing ability someone has to increase their state pensions by 10.4% for each year they delay taking them.

As you can see there, people already have the option to retire later and increase their state pensions and today could choose to do that and get the same effect as if Thatcher's Conservative government hadn't changed from earnings to RPI linking.

Today, even ignoring that desire, with normal life expectancies, it's optimal to delay taking the state pensions by from three to five years because that increases the amount you get from the state over your life. One way to fund this is to use the lump sum from a personal or work pension.

But thne your drawing it for 3-5 years less, excatly how does this "increase" the amount you get, how do you know how long your going to live?.
another thing, if pensions are based on earnings, whet will happen if Inflation is more than earnings, you will all be saying "It should be linked to Inflation"

Paul_Herring

roddydogs wrote:

But thne your drawing it for 3-5 years less, excatly how does this "increase" the amount you get,

http://www.thepensionservice.gov.uk/state-pension/deferral/what-are-my-choices.asp

To get extra State Pension you have to put off claiming for at least five weeks.

o You build up extra State Pension at 1% of your normal weekly State Pension rate for every five weeks you put off claiming (this is equivalent to about 10.4% extra for every full year you put off claiming). The amount of extra State Pension you receive when you claim it is calculated by adding up all the extra State Pension accrued. It is not compounded and should not be seen as interest.
o Extra State Pension is paid on top of your normal weekly State Pension from when you start claiming it, and continues for as long as you are getting State Pension. Extra State Pension is increased each April in line with increases to your State Pension.
[...]
To get a lump-sum payment you have to put off claiming for a continuous period of at least 12 months (which cannot include any period before 6 April 2005).

o The lump sum is a one-off, taxable payment based on the amount of normal weekly State Pension you would have received, plus interest. You also get your State Pension paid at the normal rate from when you start claiming it.
o The interest rate will always be 2% above the Bank Rate set by the Bank of England (so if the base rate was 4.5%, the rate of interest would be 6.5%). As the Bank Rate set by the Bank of England may change from time to time, the rate of interest used to calculate the lump sum can also change.

marklv

So what? Most other countries in Europe contribute around 12% of GDP to the state pension; even if we have to increase our paltry contribution to 8% this would still be well below average. One suggestion: drop all these pointless foreign wars in Afghanistan, Iraq, etc, drop useless nuclear weapons that can never be used and you'll see big savings.

Why is there so much obsession with preventing increases in state spending on retirement provision? If there is one thing that the government should spend money on it is precisely this.

Old_Slaphead

marklv wrote: »

One suggestion: drop all these pointless foreign wars in Afghanistan, Iraq, etc, drop useless nuclear weapons that can never be used and you'll see big savings.

Why is there so much obsession with preventing increases in state spending on retirement provision? If there is one thing that the government should spend money on it is precisely this.

Here's another suggestion - scrap public sector pensions....that would save far, far more. Savings could be redirected into the old age pension.

Now that would be a good idea !

marklv

Old_Slaphead wrote: »

Here's another suggestion - scrap public sector pensions....that would save far, far more. Savings could be redirected into the old age pension.

Now that would be a good idea !

I would agree to that as long as the state pension was increased fourfold, pegged to average earnings and the retirement age reduced to 62.

Old_Slaphead

marklv wrote: »

I would agree to that as long as the state pension was increased fourfold, pegged to average earnings and the retirement age reduced to 62.

So what you're saying is that the average worker should be allowed to retire at 62 on full pay - sounds good to me.

Who's gonna pay?

My crude calculation suggests that each of the 28million workers will be required to pay an extra £11,000pa in taxes/NI each year.

marklv

Old_Slaphead wrote: »

So what you're saying is that the average worker should be allowed to retire at 62 on full pay - sounds good to me.

Who's gonna pay?

My crude calculation suggests that each of the 28million workers will be required to pay an extra £11,000pa in taxes/NI each year.

Exactly - that's why your suggestion of getting rid of public sector pensions is insane. A fair quid-pro-quo would be hugely unaffordable, so it's much better to continue the existing system.