Are pensions only for high rate taxpayers who own a house?

zagfles

jamesd wrote: »

I've read all three of the reports of the Turner Pensions Commission. On page 249 of the Second Report they proposed that it would be reasonable to consider an increase of spending on state pensions from about 6.1% to between 7.5% and 8% of GDP.

The UK currently has taxes of about 39% of GDP. So an increase to say the higher 8% figure would mean an increase to the taxes paid by (8-6.1)/0.4 = 4.75% added to say the basic rate of income tax if the working population stays the same.

For those who don't know how the demographics look, today there are around 30 pensioners per hundred working people. By 2050 without later state pension age the expectation was 54. So 54/30 = 1.8 times the tax cost per worker.

What is it with the later state pension age? The state pension age will be at least 3 years higher then, probably more, which changes the ratio completely. If average life expectancy is state pension age plus 18 years and it changes to state pension age plus 15 years, then you have about 17% less pensioners and 7% more workers.

So adding in that effect we end up with an increase in the basic tax rate of 4.75 * 1.8 = 8.55% before allowing for the effect of index linking pensions and a flat rate pension.

Why is index-linking a cost? Pensions rise in line with earnings, but so do tax revenues (since they are generally a percentage of earnings or spending, and so will increase with earnings). OK for short periods like in a recession pensions will go up by more than earnings, but that won't be the norm (or if it is we've got far more serious problems which will affect any form of pension savings).

As for the flat pension, this is pretty much cost neutral since it will incorporate the second state pension plus sweep up means tested benefits like pension credit. People on higher incomes will be worse off as the flat pension will be less than what they'd have got in basic state pension plus S2P/SERPS.

jamesd

Thanks, that should have been earnings linking, not index linking.

jamesd

A later state pension age will help. Too soon to say what the flat pension will do, it depends in part on how much of HB and CTC entitlement it eliminates. My expectation is that with a Liberal democrat influence the net cost will go higher, not lower. They are into radical wealth redistribution, even more so than Labour. But that and higher taxes in general are pretty much the opposite of traditional Conservative Party values so the discussions are probably quite heated.

There is one safe bet, though: this government isn't going to tell voters how great the costs are in a fully truthful and open way so that voters can have an informed discussion with their MPs on the subject.