IFS: Targeted support could help mitigate consequences of state pension age increases for many on low incomes

The state pension age will increase again from 66 to 67 between 2026 and 2028. This will yield substantial savings (around £6 billion per year) for the public purse, but will also disproportionately hit many low-income people, in particular those who already struggle to remain in paid work until the current state pension age.

A new report on the means-tested benefit system around the state pension age, published today as part of ThePensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust, suggests two ways in which targeted additional state support could help mitigate the effects of a higher state pension age for particularly vulnerable groups. The public finance cost of each of these targeted measures would be a fraction of the savings to the exchequer from increasing the state pension age.

The two ways for targeting support are:

1. Provide additional support to those on universal credit one year below the state pension age. For example, an increase of 70% to the universal credit standard allowance for this group – which would be enough to halve the gap in one measure of the generosity of universal credit relative to pension credit – would be targeted at those on the lowest incomes and would reduce the relative income poverty rate by around 5 percentage points in the affected age group (roughly 30,000 households). The annual cost of this policy would be around £600 million, or a tenth of the exchequer gain coming from a one-year rise in the state pension age.
2. Target increased support only at those receiving both universal credit and health-related benefits in the year before the state pension age. This would cost around £200 million per year. Because of the narrower targeting based on disability benefit receipt, the reduction in the poverty rate among this age group would be smaller: 3,000 households.

The benefits of any policies that increase state support for those with low incomes need to be balanced against incentives. Higher universal credit allowances would come at the cost of some people having reduced work incentives. Targeting support through health benefits would increase the incentive for people to claim those benefits, which have already seen a dramatic increase in caseloads especially since the pandemic.

There could be a case for more support for those on low incomes in their mid 60s than the options we have considered, but both the cost, and potential negative effects on employment, would grow further if the scale of the support was increased.

We also examine risks within the current pensioner benefit system, particularly for private renters. Poverty rates among pensioners are highest among private renters (at 38%), and they are a growing group within the retiree population. Even with the full new state pension, single private renters are one of the groups most at risk of falling into poverty in retirement as it is often the case that the means-tested support they receive for their housing costs is not sufficient to cover their rents in full.

To address this, we have modelled the effects of increasing pensioner housing benefit by allowing an additional bedroom for pensioners when calculating their maximum benefit rates. This would mean that both single pensioners and pensioner couples would become eligible for support based on rents for two-bedroom homes in their local area. Pensioners often spend a lot of time at home, and it might be felt appropriate for pensioners to be able to have children or grandchildren over to stay in a room of their own, or for pensioner couples to have an additional bedroom for themselves should they need it. The change would provide immediate support to pensioner households whose rents are currently not covered by their housing benefit, and would make it easier for pensioners to find affordable properties in their area. It would initially cost around £150 million per year, though this would increase over time, not least as the prevalence of renting in retirement increases.

Heidi Karjalainen, a Senior Research Economist at IFS and an author of the report, said:

‘Increasing the state pension age is a key policy to help the long-run sustainability of the public finances in the face of people living longer at older ages. But it does hit those on low incomes who are already not in paid work before the current state pension age particularly hard.

‘Failing to support the most harmed groups risks undermining public confidence in the system and, in particular, the desirability of increases in the state pension age. There is a good case for using some of the savings resulting from a higher state pension age for targeted enhancements to working-age benefits for the most adversely affected groups in the run-up to state pension age.'

Mubin Haq, CEO of abrdn Financial Fairness Trust, said:

‘Levels of poverty amongst private renter pensioners are three times the rate amongst owner-occupiers, with the number living in the private rented sector set to rise significantly. Hardship is also high amongst social renters; however, the situation for private renter pensioners is particularly worrying. Not only are rents higher, and there is less security of tenure, but state support with housing costs for those on low incomes often fails to meet actual costs or needs and it doesn't tackle the low availability of one-bedroom properties.

‘Increasing housing benefit to allow for a second bedroom would better meet the real cost of private renting and provide much-needed space for carers and family to support older people with their increasing health needs.'

Notes to Editor

1. ‘Means-tested support for people approaching and beyond state pension age' is an IFS report by Jonathan Cribb, Carl Emmerson and Heidi Karjalainen.
2. The Pensions Review – led by the Institute for Fiscal Studies in partnership with abrdn Financial Fairness Trust – is a big, 2½-year, project that is comprehensively assessing the consequences of current pension policy, the economic environment and individual behaviour for the future of living standards in retirement. It is also providing recommendations for reform to improve outcomes for future generations of pensioners across the UK.
3. The abrdn Financial Fairness Trust is supporting this project (grant reference 202206-GR000068). The Trust funds research, policy work and related campaigning activities to tackle financial problems and improve living standards for people on low-to-middle incomes in the UK. It is an independent charitable trust. More detail on its activities can be found at www.financialfairness.org.uk. If you would like to speak to its press office, please contact Charlotte Morris charlotte.morris@financialfairness.org.uk 07716 225237.
4. Funding from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS (grant number ES/T014334/1) is also gratefully acknowledged.