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Pensioner poverty over the next decade: what role for tax and benefit reform? IFS Commentary 103

Explore the impact of tax and benefit reforms on pensioner poverty over the next decade using a dynamic simulation model. The study analyzes data from 2.5 million pensioners living below the poverty line, recent benefit entitlement increases, and the 2006-2007 pension reform. Results include demographic projections, private income analysis, and poverty projections based on a sample of 11,500 adults aged 50+ from the English Longitudinal Survey of Aging.

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Pensioner poverty over the next decade: what role for tax and benefit reform? IFS Commentary 103

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  1. Pensioner poverty over the next decade: what role for tax and benefit reform? IFS Commentary 103 http://dx.nbdrs.com/10.1920/co.ifs.2007.0103 Mike Brewer, James Browne, Carl Emmerson, Alissa Goodman, Ali Muriel and Gemma Tetlow Institute for Fiscal Studies, UK

  2. Policy background • 2.5 million pensioners in the UK living below the relative poverty line in 1997/98 • Significant increases in benefit entitlements for pensioners since 1997 • Relative poverty fallen by 0.3 million • Major reform in 2006 – 2007 (“Pensions White Paper”, “Pensions Act”) • Impact on future pensioner poverty? • Forecasting pensioner poverty requires a dynamic simulation model • current pensioners not a good guide to future pensioners

  3. Technical content: micro-simulation content & ageing • Sample of 11,500 adults aged 50+ from 2002 • English Longitudinal Survey of Aging • Age the population by simulating life events (“Demographic simulation”) • “Transitions” based on equations estimated from various sources, sometimes calibrated • Includes labour market behaviour, contributions to private pension, receipt of private pension • Estimate tax liabilities and entitlement to state pension and means-tested benefits (TAXBEN) (“Policy simulation”) • Examine population aged 65+ in each year from 2002 to 2017 • Bespoke project, but learned from Pensim2 (Emmerson, Reed and Shephard 2004), DYNACAN (Morrison and Dussault 2000) and SAGEMOD (Zaidi and Rake, 2001)

  4. What’s coming up [redo] • Model Results: • Demographics • Projected private incomes • Before taxes and benefits • Individual level • Projected living standards • After taxes and benefits (net income) • Family level • Poverty projections

  5. Why use ELSA? • Survey of 11,500 individuals aged 50+ in England • Longitudinal, but only had 2 waves • Advantages • Rich data on pensions • Can simulate private pension income for those who have not yet retired • Demographic characteristics, incomes (including partner’s where relevant), health & wealth • Disadvantages • Little known about household members other than spouse • Not quite best practice in recording details of income from state benefits • England, not UK • See IFS WP 05/09, IFS WP 7/12, IFS Report 67, + annual reports on ELSA (http://www.ifs.org.uk/elsa/)

  6. Demographic simulations 2002/03 ELSA Mortality • Depends on: • Age • Sex • Social Class • Depends on: • Age • Sex • Income • Education • Marital Status • Depends on: • Age • Sex • Income • Education • Marital Status • Health • Time trend • Depends on: • Age • Sex • Income • Education • Marital Status • Health • Current benefits • Partner’s benefits • Assumes: • No real growth in income components except - • 2% real earnings growth for 50-54 year olds 2017/18 Simulated Health Labour Market Disability Benefits 2005/06 Simulated Private Incomes 2003/04 Simulated 2004/05 Simulated

  7. Demographic simulations 2017/18 Net Incomes & Poverty 2017/18 Simulated • TAXBEN • Assesses tax liability & • benefit/tax credit eligibility • Different policy scenarios • can be modelled 2004/05 Net Incomes & Poverty 2004/05 Simulated 2003/04 Net Incomes & Poverty 2003/04 Simulated

  8. Demographic simulations • Mortality • Use “life-tables” (age, sex) adjusted by social class • Health (“long-standing illness or disability that limits daily activities”) • Age, sex, marital status, education, income quintile, • Labour market (full-time, part-time, no work • Age, sex, education, health (BHPS 1991-2005) • Can only “downsize” so calibrate to actual employment rates 2002 to 2005 • Disability benefits (several) • Start: age, sex, education, health, private income (BHPS 1991-2005). Stop: age, sex • Calibrated to official on-flow and off-flow rates • Create 250 simulated populations, 2002/3 to 2017/18

  9. Demographic simulations • We don’t model • Divorce or remarriage or fertility (remember, aged 50+) • Changes in household composition • Tenure change/geographical mobility • Moving into residential care • Assumptions on • Earnings growth (2% real a year if aged < 55) & earnings drop if go part-time • Growth in non-earned, non-pension income (0% real) • Contributions to private pensions • Growth of pension wealth/fund • Saving/dissaving (none allowed, except pension wealth annuitized when retire/downsize) • Private pension income when retire/downsize (IFS WP 05/09)

  10. Demographic simulations: results [add some more]

  11. Projected English population 65+

  12. Projected English population 65+

  13. Hazard of becoming “unhealthy” % who are unhealthy is 40-45% amongst 65+ and little change over time

  14. Hazard of stopping work

  15. Simulated employment rates

  16. Private income projections

  17. Private income projections: results • Consistent growth in mean private income among 65+ population • despite assuming zero real growth for almost all income components • cohort effect is driving up average • Strongest growth in earnings from employment • new cohorts reaching 65 are higher earners, on average, and - • our model predicts rising proportions of individuals aged 65 and over remaining in work

  18. Sources of income, 2003–04 to 2017–18 Mean Private Income

  19. Mean private income, by birth cohort, 2003–04 to 2017–18

  20. Average annual private income growth at different points in the income scale: 2003–04 to 2017–18

  21. Net income projections

  22. State provision of retirement income • Basic state pension - Flat-rate pension to any retired person who has paid sufficient contributions over their working life (also credits for caring activities and receipt of some out-of-work benefits) • Indexed to prices since 1981; value declining relative to earnings • Earnings-Related Pension (SERPS, S2P) • Additional retirement income to those without access to a personal or occupation pension (skewed towards lower earners) • If opt out, then pay lower payroll taxes • Means-tested benefits (Pension Credit) • Guarantee Credit: Tops up income to an ‘appropriate’ minimum level • Savings Credit: rewards people over 65 who have saved for retirement

  23. Basic State Pension Pension credit

  24. Pensions Act 2007 • Continued earnings-indexation of Pension Credit Guarantee, but smaller increases in Savings Credit to stop 40% taper spreading up income distribution • Increased basic state pension coverage from 2010 • Earnings indexation of basic state pension from 2012 (aspiration) • Skew S2P towards low earners • “Personal Accounts” – compulsory retirement saving (not considered today) • 4% employee contribution (from net salary), 3% employer, 1% tax rebate • Can opt out if employer offers better alternative • Increase state pension age (not considered today)

  25. Policy stability? “This is our New Insurance Contract for pensions. This Contract will deliver the security we all want, now and for the future.” DSS, Green Paper, 1998 “Pensions policy has to be for the long term. If we want people to plan for the future, stability in the framework of pensions policy is a key component.” DWP, Green Paper, 2002 “These reforms set the direction for the long-term future of pensions and retirement savings. They will create a system that is coherent, comprehensive and which will stand the test of time” DWP, White Paper, 2006 Next reform: 2010?

  26. Net (family) income and poverty rate • Demographic simulations passed through TAXBEN • Estimates tax liabilities & benefit entitlements • Incorporates estimates of non-take-up of means-tested benefits • Construct “equivalised net income” • Identical to that used in official poverty statistics, except at family level, not household level • Income from private sources & state benefits/tax credits • Net of direct taxes including council tax, income tax and National Insurance Contributions • No imputed income for owner-occupiers, housing costs not deducted • Construct “poverty indicator” • Official measure is “proportion of those above pension age living in households below 60% of median income” • We use “family” rather than “household” income, and for those aged 65 or over; behaves in similar way to the official pensioner poverty rate

  27. Simulated net family income2003–04 to 2017–18 Mean Median

  28. Mean net family income among those aged 65 and over, by birth cohort, 2003–04 to 2017–18

  29. Average annual net income growth at different points in the income scale: 2003–04 to 2017–18

  30. Our measure of poverty • Choose poverty line to calibrate 2005/06 poverty rate in ELSA to that in official dataset (HBAI) • Up-rate poverty line at 1.8% a year for future years • 1.8% is long-run rate of growth of median • Roughly corresponds to 2% real growth in earnings

  31. Net income distribution: 2003 22% Note: net incomes shown under “White Paper” policy baseline

  32. 2004 Note: net incomes shown under “White Paper” policy baseline

  33. 2005 Note: net incomes shown under “White Paper” policy baseline

  34. 2006 Note: net incomes shown under “White Paper” policy baseline

  35. 2007 Note: net incomes shown under “White Paper” policy baseline

  36. 2008 Note: net incomes shown under “White Paper” policy baseline

  37. 2009 Note: net incomes shown under “White Paper” policy baseline

  38. 2010 Note: net incomes shown under “White Paper” policy baseline

  39. 2011 Note: net incomes shown under “White Paper” policy baseline

  40. 2012 Note: net incomes shown under “White Paper” policy baseline

  41. 2013 Note: net incomes shown under “White Paper” policy baseline

  42. 2014 Note: net incomes shown under “White Paper” policy baseline

  43. 2015 Note: net incomes shown under “White Paper” policy baseline

  44. 2016 Note: net incomes shown under “White Paper” policy baseline

  45. 2017 5% Note: net incomes shown under “White Paper” policy baseline

  46. 2017 Uprating poverty line with long run median income growth (1.8% p.a) in future 19% Note: net incomes shown under “White Paper” policy baseline

  47. Choosing a ‘preferred’ simulation Model outcome depends on random draws • We repeat demographic simulation 250 times • Calculate poverty rates for each run • Choose simulation with least squared deviation from median poverty rate (on average) over 15 years

  48. Choosing a ‘preferred’ simulation

  49. Extent of means-testing before and after Pensions Act

  50. Poverty rate 1996-97 to 2017-18 under White Paper baseline ‘Calibrate’ poverty line so that 2005-06 poverty rate is same in ELSA and ‘official’ measure

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