Pensioner incomes in the UK
Paul Johnson, IFS
Presentation to first CEPAR annual conference, July 2
2013
UNSW Sydney
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Pensioners and their incomes
• The UK has traditionally had low state pension provision
– And high levels of pensioner poverty
• Much policy towards current pensioners seems to be predicated
on this model of the world
– Pensioners almost wholly protected from current austerity measures
• But what has actually been happening to pensioner incomes over
the last decades?
– And why
• And what about the future?
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Background to the UK system (state)
• We spend about 7% of GDP on state benefits for pensioners
– Well below European average
• Basic state pension at 15% of average earnings
• Additional earnings related pension.
– Average receipt about a third of basic pension
• Significant means tested benefits
– A fifth of pensioners receive “pension credit”
– Also receipt of support for housing costs and local taxes
• Additional universal add-ons
– Winter fuel payment
– Free bus travel
– Free TV licences
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Background to the UK system (private)
• Historic high levels of occupational pension coverage
– Average private pension receipt about £6,500 a year
• Defined benefit schemes in private sector almost all closed to new
members
– Public sector still provides generous coverage
• Around half of private workforce in some form of DC scheme
– Should increase rapidly with auto enrolment
– But contributions – and hence future benefits – much lower than DB
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The world 30 years ago
• Pensioner incomes were on average only about half those of the
working age population
• Note – throughout incomes are household incomes, net of taxes
and receipt of benefits, and equivalised. Also generally net of
housing costs
– Using Family Resources Survey and Family Expenditure Survey data
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Median income by age (GB)
After housing costs, 1978-1980
Median income (£ per week)
500
450
400
350
300
250
200
150
100
Age
Notes and source: see Figure 5.6 of Living Standards, Poverty and Inequality in the UK: 2013
The world 30 years ago
• Pensioner incomes were on average only about half those of the
working age population
• Pensioners were concentrated in the bottom quintiles of the
income distribution
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Two thirds of pensioners in bottom two quintiles (AHC)
100%
1979
1979
1979
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Parents and children
1st quintile (lowest income)
Pensioners
2nd
3rd
Working-age without children
4th
5th quintile (highest income)
Notes and source: see Figure E.1 of Living Standards, Poverty and Inequality in the UK: 2013
The world 30 years ago
• Pensioner incomes were on average only about half those of the
working age population
• Pensioners were concentrated in the bottom quintiles of the
income distribution
• And pensioner poverty rates much higher than for rest of the
population
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Relative poverty rates by age group (AHC)
1978-80
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: Figure 6.3a of Living Standards, Poverty and Inequality: 2013
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This state of affairs driven by:
• Low flat rate basic pension at around 20% of average earnings
– To which many, especially women, did not have full entitlement
• Minimal earnings related top ups
• Minimum means-tested benefits well below poverty line
• Significant private incomes available only to a small minority
– Related to rules of DB pension schemes more than coverage
– Little or no protection against inflation, or for early leavers
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Pensioner income sources (GB)
State pensions and other benefits
Private pensions
Savings and investments
Earnings and self-employment income
Other
Contribution to income (£ per week)
1,000
1978–1980
900
800
700
600
500
400
300
200
100
0
-100
1
2
3
4
5
All
Pensioner income quintile
Notes and source: see Figure 5.3 of Living Standards, Poverty and Inequality in the UK: 2013
Things have changed dramatically since then
• Median pensioner incomes are now similar to those of the
working age population
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Median incomes vary little by age
After housing costs, 2011-12
After housing costs, 1978-1980
Median income (£ per week)
500
450
400
350
300
250
200
150
100
Age
Notes and source: see Figure 5.6 of Living Standards, Poverty and Inequality in the UK: 2013
A short digression
• So far we have only been comparing current pensioners with
current workers
– What about actual replacement rates
• We can look at those using ELSA
• And we can define different measures of income
– Taking account, or not, of the possibility that wealth might be
annuitised
• Replacement rates are high
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Distribution of replacement rates 2008/09
100%
Percentage of individuals
90%
80%
70%
60%
50%
40%
Narrow
30%
20%
Broad
10%
0%
0
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25
50
75
100
125
150
175
Replacement of total net family income (%)
Notes: One observation per individual, individuals aged 50 to
SPA, assumes probabilistic selection into retirement
200
Proportion at risk of ‘inadequate’ resources
Income coming from:
Proportion falling below
thresholds
PCG
(1)
Pension wealth only
(2)
(1) plus non-housing wealth
(3)
(2) plus other wealth
(4)
(3) plus expected inheritances
(5)
(4) plus pension credit
(6)
(5) Replacing annuitised housing
wealth with consumption flow
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Notes: 2008/9, individuals aged 50 to SPA
67%
80%
Proportion at risk of ‘inadequate’ resources
Income coming from:
(1)
Pension wealth only
(2)
(1) plus non-housing wealth
(3)
(2) plus other wealth
(4)
(3) plus expected inheritances
(5)
(4) plus pension credit
(6)
(5) Replacing annuitised housing
wealth with consumption flow
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Notes: 2008/9, individuals aged 50 to SPA
Proportion falling below
thresholds
PCG
67%
80%
12
41
53
Proportion at risk of ‘inadequate’ resources
Income coming from:
Proportion falling below
thresholds
PCG
67%
80%
(1)
Pension wealth only
12
41
53
(2)
(1) plus non-housing wealth
10
30
42
(3)
(2) plus other wealth
(4)
(3) plus expected inheritances
(5)
(4) plus pension credit
(6)
(5) Replacing annuitised housing
wealth with consumption flow
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Notes: 2008/9, individuals aged 50 to SPA
Proportion at risk of ‘inadequate’ resources
Income coming from:
Proportion falling below
thresholds
PCG
67%
80%
(1)
Pension wealth only
12
41
53
(2)
(1) plus non-housing wealth
10
30
42
(3)
(2) plus other wealth
7
20
30
(4)
(3) plus expected inheritances
7
18
28
(5)
(4) plus pension credit
-
12
22
(6)
(5) Replacing annuitised housing
wealth with consumption flow
-
10
21
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Notes: 2008/9, individuals aged 50 to SPA
Things have changed dramatically since then
• Median pensioner incomes are now similar to those of the
working age population
• And pensioners are distributed across the income distribution
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Pensioners now least likely to be in bottom quintile
100%
1979 1996 2011
1979 1996 2011
1979 1996 2011
Parents and children
Pensioners
Working-age without children
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1st quintile (lowest income)
2nd
3rd
4th
5th quintile (highest income)
Notes and source: see Figure E.1 of Living Standards, Poverty and Inequality in the UK: 2013
And less likely to be poor than the working age
1978-80
2011-12
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: Figure 6.3a of Living Standards, Poverty and Inequality: 2013
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Things have changed dramatically since then
• Median pensioner incomes are now similar to those of the
working age population
• And pensioners are distributed across the income distribution
• Driven by increases in income across the pensioner distribution
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With annual growth greater and more even than for
others (1978-1980 to 2011-12)
Average annual real income change
4.0%
Parents and children
3.5%
Working-age without children
3.0%
Pensioners
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
10
20
30
40
50
Percentile point
60
-1.0%
Notes and source: see Figure 5.2 of Living Standards, Poverty and Inequality in the UK: 2013
70
80
90
Inequality now lower among pensioners than any
other age group
1978-1980
2011-12
6.0
5.5
90:10 ratio
5.0
4.5
4.0
3.5
3.0
2.5
2.0
0
5
10
15
20
25
30
35
40
45
Age (5-year bands)
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50
55
60
65
70
75
80
All income sources more important
State pensions and other benefits
Private pensions
Savings and investments
Earnings and self-employment income
Other
Contribution to income (£ per week)
1,000
2011–12
1978–1980
900
800
700
600
500
400
300
200
100
0
-100
1
2
3
4
5
All
1
2
Pensioner income quintile
Notes and source: see Figure 5.3 of Living Standards, Poverty and Inequality in the UK: 2013
3
4
5
All
Components of pensioner income
£500
Average income
£400
£300
£200
£100
£0
-£100
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Other income
Earned income
Investment income
Deductions from income
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State pension and benefit income
Private pension income
Self-employment income
What has driven these changes – state incomes?
• 75% increase in real benefit receipt
– But NOT driven by increases in level of basic pension
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120
30
100
25
80
20
60
15
40
Real terms (LH axis)
Relative to average earnings (RH axis)
10
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2008
2003
1998
1993
0
1988
0
1983
5
1978
20
Value relative to average earnings (%)
£ per week (April 2009 prices)
Basic pension fell relative to average earnings
What has driven these changes – state incomes?
• 75% increase in real benefit receipt
– But NOT driven by increases in level of basic pension
• Bigger proportional increases at top than bottom
• Increase in benefit incomes driven by
– Increased entitlement to basic pension
– Maturation of SERPS
– Introduction of new universal benefits
– Big increases in means-tested benefits
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Tax benefit changes 1997-98 to 2010-11
Loss as a percentage of net income
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Poorest 2
3
4
5
6
7
8
9 Richest
Income decile group
Pensioners
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All
All
What has driven these changes – state incomes?
• 75% increase in real benefit receipt
– But NOT driven by increases in level of basic pension
• Bigger proportional increases at top than bottom
• Increase in benefit incomes driven by
– Increased entitlement to basic pension
– Maturation of SERPS
– Introduction of new universal benefits
– Big increases in means-tested benefits
• Tax changes have also benefited pensioners
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Average income tax and NI rates paid by workers
and pensioners by income level
Income tax and employee NICs as a % of earnings
40%
35%
30%
25%
20%
15%
10%
5%
0%
£0
£10,000
£20,000
£30,000
£40,000
Annual gross income
Age under 65, 1978-79
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Age under 65, 2011-12
£50,000
Average income tax and NI rates paid by workers
and pensioners by income level
Income tax and employee NICs as a % of earnings
40%
35%
30%
25%
20%
15%
10%
5%
0%
£0
£10,000
£20,000
£30,000
£40,000
Annual gross income
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Age 65-74, 1978-79
Age under 65, 1978-79
Age 65-74, 2011-12
Age under 65, 2011-12
£50,000
What has driven these changes – private
incomes?
• Driven largely by a four-fold increase in incomes from private
pensions
– Increases right across the distribution
– Account for 10% of income even for poorest quintile
– Most important income source for top quintile
• This resulted in large part from a range of new protections against
inflation and for job changers
– Accommodated by strong stock markets
• But for the future private DB schemes are dead or dying
– And DC schemes will offer much less
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Pensioners have done especially well recently
• Their incomes have continued to grow since 2008
– In sharp contrast to those of other age groups
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Growth in median income by age (BHC, GB)
2001–02 to 2007–08
2007–08 to 2011–12
4%
Average annual growth
3%
2%
1%
0%
-1%
-2%
-3%
-4%
0s
10s
20s
30s
40s
50s
Age
Notes and source: see Figure 5.7 of Living Standards, Poverty and Inequality in the UK: 2013
60s
70s
Pensioners have done especially well recently
• Their incomes have continued to grow since 2008
– In sharp contrast to those of other age groups
• Tax and benefit changes have largely protected pensioners
– “Triple lock” on state pensions
– No cuts to means-tested benefits – in contrast to those of working
age
– As yet no reduction in additional universal benefits
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Changes January 2011 to April 2014
Loss as a percentage of net income
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
-3.5%
-4.0%
-4.5%
-5.0%
Poorest 2
3
4
5
6
7
8
9 Richest
Income decile group
Pensioners
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All
All
But the future may not be so rosy
• SERPS and S2P are disappearing and being replaced by much less
generous single tier pension
• Private sector DB schemes are disappearing
– fewer than 10% of private sector employees are now active members
of a DB occupational scheme
– Down from a third in 1997
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1978–79
1979–80
1980–81
1981–82
1982–83
1983–84
1984–85
1985–86
1986–87
1987–88
1988–89
1989–90
1990–91
1991–92
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
Number of members (000s)
Recent trends in DB coverage
7,000
6,000
Public
Private
5,000
4,000
3,000
2,000
1,000
0
Financial year
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Notes & sources: see Figure 4.1 of Emmerson and Tetlow (2010).
But the future may not be so rosy
• SERPS and S2P are disappearing and being replaced by much less
generous single tier pension
• Private sector DB schemes are disappearing
– fewer than 10% of private sector employees are now active members
of a DB occupational scheme
– Down from a third in 1997
• DC schemes are typically much less generous
• Auto-enrolment will make only a modest difference
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Conclusions
• In many ways the last three decades have been a triumph.
Pensioner poverty has fallen dramatically
• Down to expansion in both occupational and state pensions
• Current policy continues to protect current and soon to be
pensioners
• But the model is not being sustained
– Generous occupational schemes in the private sector are gone
– State pensions for the future will be lower
• The present is no guide to the future
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