Caroline Abrahams is the Director of Age UK. This article is the first in a series on ConservativeHome focusing on the topic of intergenerational fairness.
What’s the State Pension worth on average? Not surprisingly, most non-retired people don’t know, and the result is that when the ‘triple lock’ is discussed some rather important contextual information like this is usually absent.
The debate about whether the parties will maintain the ‘triple lock’ – the uprating of the basic pension by prices, earnings or 2.5 per cent – has focused on the ‘intergenerational fairness’ of these increases. This discussion has been sharpened by a recent report from the Resolution Foundation that included the striking finding that average pensioner incomes have now risen above those of people of working age.
Stated this baldly, this assertion is somewhat disingenuous though as it only holds if you look at incomes on an ‘after housing costs’ basis. It reflects the fact that many older people already own their homes outright, whereas younger people are more likely to be paying eye-watering amounts towards a rent or mortgage. Our dysfunctional housing market is surely a big policy problem that needs addressing, but I don’t think it’s fair to use it to say that, on average, older people have higher incomes than younger groups, when on a ‘before housing costs’ basis they don’t. The report’s approach also overlooks some expenses that are especially significant for older people, notably the cost of social care for those who need it.
Having said this, it is good that pensioner incomes have gone up on average in recent years, and by a significant degree, as the Resolution Foundation report is fair to observe. According to the authors, this is due more to people working for longer and increases in occupational pensions, as well as to more pensioners owning their own homes, than to increased state support, very welcome though that is.
However, a feature of our growing older population of some 12 million people is its enormous diversity, including in terms of income and wealth. Certainly, some people have done very well, but at the other end of the spectrum 1.9 million live in poverty and only about half the 65-plus population have enough income to pay income tax.
The same enormous differences are also evident among those aged 55 to 64 who are nearing retirement. The top ten per cent of this group are worth well over a million, but the bottom ten per cent own less than £28,000 (this figure includes all their possessions, housing and pension wealth). And two in five women in this group have no pension wealth at all and so are often looking ahead with trepidation.
So my question really matters, especially for the less well-off: how much is the State Pension worth? The answer is that the State Pension is worth about £7,000 a year on average, less than many suppose. This is about half the National Living Wage and a quarter of median earnings, even with the ‘triple lock’. The State Pension also forms the bulk of the retirement income of the majority of today’s pensioners.
The triple lock meant that last year’s increase to the basic State Pension was enough for a designer latte at a coffee shop for the affluent, but a significant addition to the weekly budget for the poor. Although the ‘triple lock’ sounds generous, it delivers relatively little in cash terms, because not very much of not very much is….not very much. Many older people told us that they did not see that increase as particularly generous, given they had made contributions through National Insurance all their lives, often starting work in their mid-teens. It is also worth remembering that in 1950 only 3.4 per cent of young people went to university; that our State Pension is worth less in real terms than in many comparable countries; and that in some earlier times it was worth more in relation to earnings than it is today.
Different generations experience different challenges and opportunities and the Institute of Fiscal Studies (IFS) has helpfully compared the changing financial fortunes of the various cohorts born between the 1940s and 1970s. The younger cohorts earned more at an earlier age than older ones, but spent rather than saved more, and did not experience the same income rises between 30 and 50 as older groups had. They were less likely to own their own home and had lower pension wealth. However, more of them were anticipating an inheritance, so the authors conclude “inheritances look like the major potential reason why the later economic position of cohorts born in the 1960s and 1970s could yet turn out better than that of their predecessors”. Those most likely to benefit from inheritance are usually already financially comfortable, so these differences between the affluent and the less well-off seem likely to widen.
Against this context, you will not be surprised to learn that the differences in income and wealth within generations are significantly greater than those between them; a clear and consistent finding from official statistics that is usually omitted from intergenerational fairness debates.
Age UK therefore believes the case for retaining the ‘triple lock’ remains strong. Certainly, the people who would be hurt the most if it wasn’t there are older people on low and modest incomes, particularly women. We believe that an average £7,000 a year is not lavish for the State Pension, given how reliant on it so many older people are, and that it is crucial that its value is sustained.
A final consideration is that many of today’s pensioners had expected to buoy up their retirement incomes with interest on their savings, but years of historically low interest rates have largely scuppered that hope – a personal disaster for some living on quite modest incomes. For sure, low interest rates have helped people who want to buy a home – largely younger groups – but older people who had put money aside have lost out, sometimes badly.
Age UK wants every older person to have a decent retirement income, both now and in the future, so we are passionately interested in fairness for future older generations as well as for the current one. Too many ‘intergenerational fairness’ debates, though – including the current one about the ‘triple lock’ – miss out some key facts, often to older people’s disadvantage. I think it’s high time that changed.