A new guarantee, linked to earnings, should be set for the UK state pension to help ensure the state pension has a sustainable long-term future, a new research argues.
The new report, led by the Institute for Fiscal Studies (IFS) in partnership with the abrdn Financial Fairness Trust, suggests the Government should state what it believes to be an appropriate level for the new state pension relative to average earnings, as has happened with the National Living Wage.
The IFS argues there is currently no sense of what level the state pension will reach or when.
The Pensions Review said, under the triple lock, future pensioners nor the Government are provided with any certainty regarding the level of the state pension.
WATCH NOW: GB News panellists discuss state pension triple lock
The current triple lock mechanism that is normally used for annual state pension uprating is a commitment that the state pension will increase each April in line with whichever is highest out of the rise in inflation, earnings or 2.5 per cent.
The state pension currently stands at 30 per cent of median full-time earnings, its highest share since at least 1968, however, it remains less generous than state pensions provided in many other advanced economies that have much more limited provision of private pensions, the research said.
Once it has set a target, the Government should then legislate a pathway to meet it with a specific timetable, the IFS report said.
It suggested the Government should consider the trade-off between a higher income for pensioners and the cost to the public finances when choosing the level of the new state pension.
The authors argue many younger people have little confidence in the continued existence of the state pension and decisions over increasing the state pension age “are uncertain”.
The review suggests introducing certain guarantees, including the once the state pension reaches its target level, increases in the state pension will in the long run keep pace with growth in average earnings.
This is to ensure pensioners benefit when living standards rise.
Before and after the target level is reached, the state pension should continue to increase annually at least in line with inflation, the report said.
However, the state pension age should only rise as longevity at older ages increases, and never by the full amount of that longevity increase, the researchers said.
It’s also suggested the Government write to people around their 50th birthday, stating what their state pension age is expected to be, in order to increase confidence and understanding.
The IFS said their state pension age should then be fully guaranteed 10 years before they reach it.
Relying only on raising the state pension age in order to rein in state pension spending would impact people with lower life expectancies, such as poorer people, harder, the IFS argued.
Researchers also argued the triple lock is of more benefit to people with a higher life expectancy, such as richer people.
Heidi Karjalainen, a research economist at the IFS and author of the report, said: “A commitment by the Government to a set level of the new state pension relative to average earnings would ensure that pensioners continue to benefit from higher state pensions as living standards rise.”
Carl Emmerson, deputy director at the IFS and another author of the report, said: “A new way forward is needed to ensure that people can have confidence and certainty over the state pension as a future source of income to help avoid old-age poverty and provide a solid bedrock on top of which they can build private pension saving.”
Mubin Haq, chief executive of abrdn Financial Fairness Trust, said: “The state pension is a fundamental part of our social contract with Government. We all want to feel confident it is secure.
“However, without assurances about its future, Government risks undermining the public’s trust in its sustainability.
“The Government made a bold decision to link the National Living Wage to earnings which has cemented support for this policy. A similar measure is now needed for the state pension to deliver the financial security and living standards we all need in retirement.”
Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said: “The IFS report is a major contribution to the debate but what we need now is a broader framework for pension adequacy, setting out the level of retirement income people may get from both the state pension and workplace pension saving.”
A Department for Work and Pensions (DWP) spokesperson said: “We want to ensure the state pension remains the foundation of income in retirement for future generations in a way that it is sustainable and fair.
“Thanks to our triple lock promise, the full rate of the new state pension will rise to over £11,500 a year, and there are currently 200,000 fewer pensioners in absolute poverty than in 2009/10.
“Our recent state pension age review concluded that a universal state pension age remained the best system, providing simplicity and clarity for people, and we also remain committed to the principle of providing 10 years notice of changes to state pension age, enabling people to plan effectively for retirement.”