The Government's policies on means-tested benefits will damage incentives to work and save, according to the OECD.
In a report entitled, Ageing & Employment Policies in the UK, the OECD says the Government's policies on means' testing have to change to avoid the risk of “a pronounced slowdown in economic growth”.
The OECD says the Government needs to raise the state pension substantially to combat the effects of means' testing and index it to earnings, linking it either to citizenship or residency along the lines of the scheme suggested by the Liberal Democrat Party at its conference last week.
The OECD says the Government should consider options to simplify the two-tier state pension system and overly complex means-tested benefits.
Its report also points to a threat to economic growth posed by the number of people out of work and relying on benefits and it recommends that the Government should take further steps to restrict disability benefits from being used as a route into early retirement schemes.
The report says in the long run, an increase in the state pension should be envisaged in line with inc-reased life expectancy.