State Pensions and Inequality

Readers Question: Asses the impact of a decline in state pensions on income distribution, wages and income inequality for people aged 60 or above?

Firstly, the ‘decline in state pension’ actually means they have fallen relative to wages. For several years, state pensions were index linked – increased in line with inflation. Therefore, in real terms they stayed the same (although, some may argue the inflation rate for pensioners is higher than the official CPI method, therefore they are actually worse off in real terms)

Also pensioners have been entitled to an increased number of means tested benefits.

Having said that. These are the effects of a relative decline in state pensions.

1. Those who rely on state pensions have seen a relative fall in income; leading to an increase in income inequality within society.

  • EVAL with an increase in the number of people over 60, this has become a more significant cause of relative poverty in the UK.

2. Increased inequality between Pensioners. Pensioners who have a private pension in addition to state pension are better off and able to avoid the poverty effects of being poor.  Therefore, there is an increased income inequality between people over 60 years old.

  • However, this gap has been narrowed by the Minimum Income Guarantee for Pensioners which provides a top up for those on benefits (and provides a disincentive to save)

3. Increases incentive for people over 60 (and men over 65) to remain in work. With pensions offering relatively less compared to wages, it increases the incentive for the old to continue in work. Modern jobs are often more suitable for old people because they are not physically intensive.  This helps to reduce the relative poverty and inequality of pensioners.

  • However, if there is an increase in supply of labour from over 60s it could in theory reduce wage rates. However, with low unemployment rates I don’t think this is the case.
By on April 4th, 2008

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