MSE News: MPs highlight pensions confusion

gadgetmind

jamesd wrote: »

"It says that in its calculations benefits accrue at £5.05 of additional state benefit for every year worked

That's double the rate that I'm currently accumulating S2P so sounds totally bogus. I think that £1.60 a week is far closer to the actual figure.

jamesd

Thanks for objecting. You're right, the number given was somewhat bogus because it doesn't apply for the whole working life. Here's how they got it if you look at the linked IFS page:

Basic State Pension: £3.59
Additional State Pension: £1.46 (low earner) or £2.22 (high earner)

Both are the accrual for each year worked.

But that full accrual rate is only for the time when both basic and additional state pensions are being accrued. So correcting that:

30 years of BSP and ASP at £5.05 a year = £151.50
20 years of only ASP at £1.46 a year (worked 18-68) = £29.20
Total state pensions under current system: £180.70

So that's a loss of £180.70 - £144 = £36.70 a week, £1,908.40 a year.

Using the 3.516% annuity rate from my earlier post the cost of that is a lump sum of £54,277 in today's money.

So I've edited my earlier post to use this lower number.

wakeupalarm

I don't know why they are using £1.46 for ASP maybe its the historic rate but current S2P is £1.70 for someone on National Minimum Wage.

Under the current system someone starting today working 30 years on NMW would accumulate a state pension of £158.45 and would still have up to another 20 years of S2P so potentially another £34 giving a grand total of £192.45.

Under the new improved Flat Rate Pension which apparently benefits women and the low paid that same person on NMW would receive a maximum of £144 Flat rate pension after working 35 years and would not be able to add any S2P in the remaining 15 years as S2P will no longer exit.

Current £192.45
Flat rate£144.00

For people earning more than the NMW the loss from the change to the Flat Rate Pension is even greater.

The confusion comes from those that perpetuate the myth that women (and men) who took time off to raise children or had caring responsibilities will some how benefit from this change. The vast majority especially the younger generations will not.

They will also be in the same boat as the person on NMW as NI credits for Basic State Pension have been awarded to women raising children up to the age of 12 (previously 16) since 1978 and S2P (for carers also) since 2002.

Stargazer57

jamesd wrote: »

Thanks for objecting. You're right, the number given was somewhat bogus because it doesn't apply for the whole working life. Here's how they got it if you look at the linked IFS page:

Basic State Pension: £3.59
Additional State Pension: £1.46 (low earner) or £2.22 (high earner)

Both are the accrual for each year worked.

But that full accrual rate is only for the time when both basic and additional state pensions are being accrued. So correcting that:

30 years of BSP and ASP at £5.05 a year = £151.50
20 years of only ASP at £1.46 a year (worked 18-68) = £29.20
Total state pensions under current system: £180.70

So that's a loss of £180.70 - £144 = £36.70 a week, £1,908.40 a year.

Using the 3.516% annuity rate from my earlier post the cost of that is a lump sum of £54,277 in today's money.

So I've edited my earlier post to use this lower number.

Don't you have to allow for the fact that the £144 is earnings-linked (actually triple locked at present) in deferment and possession whereas only £107 of the projected entitlement under the present system gets the same level of increases, with the balance being increased, in possession at least, at CPI?

gadgetmind

Thanks for that. I hadn't realised that it was in theory possible for someone on minimum wage for their entire working life to accumulate so much S2P.

However.
1) Anyone who has already done this (and I doubt there exists even a single person in exactly this position) will be protected during transition.
2) Accumulating this much S2P was only possible due to some arrangements introduced to try to help the low paid by treating earnings in the lowest band as it they were at the threshold of the next band. Assuming that S2P would work exactly like this during someone's entire working life is a bit of a leap!
3) Anyone with gaps in work record due to time off to have kids, unemployment, illness, would not have been (theoretically!) accumulating this S2P but they will be earning years towards the new flat rate pension.
4) Removing means testing on the flat rate pension, and introducing auto-enrolment, means that people not yet above the flat rate will stand a very good chance of accumulating a pot that will replace what they'd "lose".

I don't think that finding hypothetical cases where someone could have used the old system to beat the new one is particularly helpful nor do I think it reflects the positive benefits of the new system for close to 100% of people in real life.

SnowMan

Stargazer57 wrote: »

Don't you have to allow for the fact that the £144 is earnings-linked (actually triple locked at present) in deferment and possession whereas only £107 of the projected entitlement under the present system gets the same level of increases, with the balance being increased, in possession at least, at CPI?

Yes you do have to factor in increases to avoid spurious results.

Factor in that (say) earnings increases might average 1.5% - 2% above CPI inflation, lets call that 1.75% pa and let's consider the effect over 40 years. Suddenly the earlier calculations are out by a factor of 2. Or put another way the old system additional pension for the national minimum wage example is half of what is calculated by ignoring it. Suddenly things don't look so bad under the new scheme for that national minimum wage employee.

Gadgetmind also makes some very valid points on why the earlier comparison for the national minimum wage employee doesn't work.

That isn't a criticism of anyone trying to do the sums but indicates the near impossibility of producing comparison figures or avoiding spurious conclusions. You can tweek the calculations and assumptions to spuriously show pretty much any conclusion you want to. The errors in those calculations and assumptions, that produce the spurious conclusions, are hidden in the complexity of it all.

The other factor to take into account in calculations is FUTURE changes to the state scheme, either the existing scheme (if the new proposals aren't implemented) or the new scheme (if implemented and later changed for example). So it is of limited importance whether the new scheme is less generous overall than the old scheme (for any particular group) more how individuals in different groups compare and that is a factor of the basic structure of the new system which is more difficult for subsequent governments to change.

So the simplest way to look at the current proposals for someone on national minimum wage is to look at the basic structure of the new system. Somebody coming into the new system on national minimum wage earns the same flat pension as someone earning more than them. And so at the simplest level the national minimum wage employee does better than a higher earning comparator under the new scheme than the old scheme.

jamesd

gadgetmind wrote: »

I hadn't realised that it was in theory possible for someone on minimum wage for their entire working life to accumulate so much S2P.

That number wasn't minimum wage, but IFS' definition of "low". Minimum wage seems to be higher than their low definition. You're not alone, most people don't seem to realise how valuable the additional state pension is, it's why saying £144 can sound good compared to just the basic state pension level, when it's really bad compared to the whole state pension.

gadgetmind wrote: »

1) Anyone who has already done this (and I doubt there exists even a single person in exactly this position) will be protected during transition.

Nobody can be in this position today because the current rates haven't been in place long enough. It's comparing the future under the current system to the future under the proposed system.

gadgetmind wrote: »

3) Anyone with gaps in work record due to time off to have kids, unemployment, illness, would not have been (theoretically!) accumulating this S2P but they will be earning years towards the new flat rate pension.

They also accumulate years in the current system and a few weeks back someone corrected me when I wrote that they weren't also getting S2P credits.

gadgetmind wrote: »

4) Removing means testing on the flat rate pension, and introducing auto-enrolment, means that people not yet above the flat rate will stand a very good chance of accumulating a pot that will replace what they'd "lose".

But that leaves them worse off, they will have paid that in addition to NI and still not receive any more money. As an exercise you might want to see what the auto-enrolment minimum pension contribution produces in the way of a pension pot and how that compares to the cost to buy an RPI annuity to replace the lost state pension.

gadgetmind wrote: »

nor do I think it reflects the positive benefits of the new system for close to 100% of people in real life.

You have that inverted: most people will be worse off under the proposed new system according to the IFS. Including those in the same situation as those who temporarily benefit during the transition.

That shouldn't be a surprise. It's supposed to be making people worse off because the objective is to cut spending on pensioners, and to transfere welfare budget spending to pension spending (means tested benefits come from a different pot than pensions) so that the NI money for pensions ends up replacing general taxation spending on means tested benefits like pension credit.

It is likely that I'll be better off but I'm not keen on reform that makes most people and in particular most low earners worse off.

jamesd

SnowMan wrote: »

You can tweek the calculations and assumptions to spuriously show pretty much any conclusion you want to.

The numbers are all in today's money terms, so your suggestion of using inflation to change them was spurious.

gadgetmind

jamesd wrote: »

Tmost people don't seem to realise how valuable the additional state pension is

Yes, S2P can be valuable, but it's currently very complex and many people do not accumulate enough S2P to reach the new flat rate.

Nobody can be in this position today because the current rates haven't been in place long enough. It's comparing the future under the current system to the future under the proposed system.

Yes, but it's doing this comparison without looking at the triple lock and also assuming current rules would remain unchanged even if there wasn't a move to flat rate. It's also trying to find the worse case individual rather than looking at the big picture.

They also accumulate years in the current system and a few weeks back someone corrected me when I wrote that they weren't also getting S2P credits.

My understanding is that neither those staying at home to raise kids, nor the self-employed, nor a number of other groups earn S2P under the current system.

But that leaves them worse off, they will have paid that in addition to NI and still not receive any more money.

This is how to world works. Huge numbers of hard-working people pay more in tax and NI than they will ever get back.

As an exercise you might want to see what the auto-enrolment minimum pension contribution produces in the way of a pension pot and how that compares to the cost to buy an RPI annuity to replace the lost state pension.

Why don't we first agree on what a typical (no, not fantasy fun world hypothetical worst case!) shortfall might be? Oh, and we'd also have to agree on what annuity rates and/or drawdown rules will be several decades hence.

You have that inverted: most people will be worse off under the proposed new system according to the IFS.

I'm close to certain that the passage of time will prove them wrong.

jamesd

It's hardly trying to find the worst case. That's a person working at a high earner (IFS definition, whatever that is) for their whole life, who under today's rules accrues £5.81 of state pension per year worked up to the first thirty, then £2.22. After 30+20 years of that they'd end up with £218.70 under current rules vs £144 under the new proposal. That'd be a loss of £74.70 a week, costing a pension pot in today's money and with today's RPI annuity rate £110,500 to buy. The triple lock is only in place to the end of this parliament so there's no telling what inflation rate(s) will end up applying but if wages are part of it, RPI is closer than CPI. The "current rules" part also seems not to be adjusting for the lack of increases in the upper accrual point so I think that the high earner loss is over-stated, while the low earner one isn't affected by this factor, so it's a more consistent one to compare.

Usually politicians prefer to try to claim to be helping low earners who work hard for a full working life, so it's always interesting when they come up proposals that do them substantial financial harm.

You really should read that IFS page, which has already addressed many of the things you've written. Like those staying at home looking after younger children getting full credits today, along with the employed and unemployed. But those ending up worse off under the proposal because the accrual rate is lower.

Having looked at a broad range of cases the IFS calculation is pretty straightforward:

while there will be a fairly complex pattern of winners and losers from the reform in the short-term – the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups (most notably the self-employed)

So it's useful to try to be sure that this change is presented accurately, with everyone able to see both individual and overall effects, including effects on national spending and inter-generational money transfers.