Supplementary memorandum submitted by
the Institute for Fiscal Studies (PC 23A)
PROPORTIONS OF PENSIONERS ON PENSIONS COMMITTEE
IN FUTURE YEARS
Forecasting the numbers of pensioners on the
Pension Credit in the future is difficult as it depends on so
many things. Crucially important factors include:
Demographicsbirth, death and
migration rates determining how many pensioners there are at any
Pension coveragetrends in:
the proportion of pensioners with occupational private pensions,
the number of working years during which pensioners were building
up pension rights, and the generosity of pensions in relation
to final salaries.
Changes in the wage distributiondifferential
growth in the earnings of the rich and poor which can feed through
to differential growth in their pension rights.
Predictions of how these factors will develop
in the distant future are time-consuming to produce and are unlikely
to be accurate. On these grounds, we have not attempted our own
estimates of each of these factors, but have instead assumed that
they remain constant over time. Where future estimates are available
(as in the case of demographics, where we have a robust prediction
that the number of pensioners will rise) they can be used to colour
interpretation of our results. Where such estimates are not available,
or not considered reliable, they should be seen as reducing the
accuracy of our estimates.
To estimate the proportion of adults over 65
on Pension Credit in 2025 and 2050 we have assumed the following
(in line with scenario one in DWP(2001) The Pension Credit: long-term
The basic state pension and the savings
credit threshold (and all other state benefits) increases in line
with price inflation only.
The Pension Credit Guarantee (the
Minimum Income Guarantee) rises in line with real earnings growth,
assumed to be 2 per cent per annum. This implies that the real
value of the Pension Credit guarantee for a single person will
be £152 in 2025 and £237 in 2050.
We went on to apply these indexed benefit systems
to our data, the 1998-99 Family Resources Survey. But it is plainly
unrealistic to assume that pensioners' private incomes will not
grow at all, so before we did so we had to adjust these. We assumed
that all the incomes that pensioners receive from sources other
than benefits rise in line with 2 per cent real earnings growth.
This crude assumption will approximate the truth if pensioners'
private incomes relate closely to their earnings over their working
life and if demographics, patterns of pension coverage and the
wage distribution are constant over time.
This methodology produces the following estimates:
52 per cent of adults aged 65 or
over would be (or have partners who are) eligible for the Pension
Credit if it were introduced today.
In 2025 this rises to 73 per cent.
By 2050 it rises again to 82 per
As we have stressed, these figures should be
treated with considerable caution as they fail to incorporate
so many things that could prove important. For example, if the
Government succeeded in persuading middle-income individuals to
save more privately for their retirement during their working
life than it might be that this will be sufficient to give significant
numbers sufficient incomes to escape the means-tested benefit
system. For such reasons we would stress that our numbers are
projections under very specific assumptionsnot forecasts
Nonetheless, the figures reflect an important
feature of the dynamics of the proposed systemthe rapid
rise in the income required to exhaust pension credit entitlement.
This arises because if the basic pension is frozen in real terms,
while the Pension Credit guarantee rises with earnings then the
maximum value of the benefit to someone with a full pension (ie
the gap between the pension and the guarantee) must rise much
faster than earnings. As the income required to exhaust Pension
Credit entitlement relates closely to this maximum entitlement,
it too rises faster than earnings. Consequently, where all else
is equal, people on higher private incomes are brought into the
Pension Credit system over time.
Senior Research Economist