Two cheers for the pension credit

The Pension Credit is introduced on Monday. New IFS research, funded by the Economic and Social Research Council, published today shows that the Pension Credit will increase support for many low and middle income pensioners, will reward pensioners for having saved in the past, but on average is unlikely to encourage retirement saving among today's working age individuals, and may even discourage it.

The detailed findings of the research are that:

• The Pension Credit reform will cost around £2 billion a year. Just over half of families with an individual aged 65 and over are eligible. The reform is progressive: the poorest ten percent of families containing an individual aged 65 or over will, if everyone who is eligible for the payment takes it up, see their income rise by over 8% on average.
• The implementation problems that arose when the Child Tax Credit and Working Tax Credit were introduced in April are unlikely to reoccur with the Pension Credit. Those who used to be in receipt of the Minimum Income Guarantee should automatically receive the Pension Credit. Other pensioners, entitled to means-tested benefits for the first time, have a year to make their claims.
• The Pension Credit is a more cost effective way of supporting low-income pensioners than increasing the Basic State Pension. But the Pension Credit will only reduce pensioner poverty if the pensioners claim it. The Government has a challenging target to pay the Pension Credit to 73% of eligible households by 2006.1 And even if this target is met exactly almost 1 million pensioner households would still be going without money to which they are entitled.
• Economic theory suggests that those who newly expect to be eligible for means-tested benefits as a result of the Pension Credit will reduce their retirement saving. The impact of the Pension Credit on the saving behaviour of those who were already expecting to be in receipt of means-tested benefits is ambiguous. But the combined impact on aggregate (private plus public) saving is almost certain to be negative.
• In the long-run, if the formal Government policy of increasing the Basic State Pension with growth in prices while increasing the Pension Credit with growth in average earnings is met, then it is likely that an increasing proportion of families with an individual aged 65 or over will be eligible for means-tested benefits. In this scenario, it is even more likely that the Pension Credit will reduce overall private saving in the long-run.

Carl Emmerson, a Programme Director at the Institute for Fiscal Studies said that "The Pension Credit will help many low to middle income pensioners and reward them for having saved in the past. But for many working age individuals it will discourage retirement saving."

Mike Brewer, a Senior Research Economist at the Institute for Fiscal Studies added "The Government has set itself a challenging target of paying the Pension Credit to 3 million families by 2006. But if this target is met exactly then nearly 1 million pensioners will still not be receiving the benefit to which they are entitled."

Ends

Notes to Editors

1. There were 1.8 million families receiving the Minimum Income Guarantee in May 2003. The Government's target is for 3 million families to be receiving the pension credit by 2006.
2. Information about the pension credit can be obtained from the Pension Service.
3. Two cheers for the Pension Credit will be available on-line.
4. For press enquiries and advance press copies, contact Emma Hyman (020 7291 4850 or @email).
5. Financial support from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy at IFS (grant number M535255111) is gratefully acknowledged.