Concerns have been raised about the negative impact of today’s pension policy on the younger generation but not all is as it seems
There have been a number of stories recently that have raised the question of whether the UK pension system is creating intergenerational inequity. For example, the ACA published research at the end of last month suggesting 80 per cent of employers with defined benefit pension schemes think the cost of the schemes is having a negative impact on intergenerational equity.f
The thinking here is that the cost of contributions to the schemes – often deficit repair contributions that do not actually increase the benefits of scheme members – reduces the amount of resources available for other parts of the business; for example, the wages of current workers.
While all employees suffer from lower wages, the members of DB schemes, who tend to be the older members of the workforce, or ex-employees, gain a more secure future benefit. Similarly, there have been questions raised about the intergenerational equity of the triple-lock uprating for the state pension.
The argument here goes that pensioners have not seen incomes fall in recent years as the rest of the population have.
So it is unfair for their state pension to rise faster than earnings and inflation at the expense of younger generations, who are not seeing incomes increasing themselves but are having to fund the increases in pensions through higher taxes.
Irrespective of the complexity of the evidence (for example, little of the growth in pensioners’ incomes is attributable to state pension income and much is driven by younger, richer, pensioners replacing older, poorer pensioners in the calculations), there is a valid discussion to be had as to how scarce resources are allocated in times of austerity.
But what often looks to be a simple trade-off (higher DB contributions means lower wages; higher state pensions now means higher cost for younger workers) is often much more complex.
Take the example of DB contributions. Although they may be reducing wages (as well as potentially internal investment and profits, and leading to higher prices), they also increase investment into markets through pension funds. And when the pensions come into payment in future, they will either be spent (increasing demand for future goods and services), taxed (increasing government revenues) or saved and passed on to future generations.
There are similar longer-term impacts from the triple lock. Ending the triple lock now and replacing it with an increase each year in line with average earnings would reduce the amount of tax and National Insurance that today’s working population would need to pay.
But it would also mean the amount of state pension that future generations could expect to receive would be lower. To fill the gap in future retirement income, they would need to contribute more to their private pensions or work longer.
So there are many complex interactions over time, as well as interactions today. To get a proper view of intergenerational inequity requires consideration of not just how individuals are affected by decisions today, but how they are affected over their whole working and retired lives.
This is not to say there is no point looking inter-generationally, or that there are no intergenerational problems in DB schemes or in the state pension – there are clearly trade-offs to be made in every area of pensions policy.
But we should caution against looking at things solely through the lens of what is happening now, rather than taking a longer-term view that encompasses how changes might affect each generation over their lifetime.
Chris Curry is director at the Pensions Policy Institute