The UK government should reform the state pension triple lock in order to afford measures to boost weak growth, the Organisation for Economic Co-operation and Development (OECD) has said.
The OECD is
The intergovernmental economic organisation of 35 member countries, founded in 1960 to stimulate economic progress and world trade, also recommended the UK increase national insurance contributions for self-employed workers.
In its biennial survey of the UK economy released on Tuesday (17 October), the OECD said linking the state pension purely to wage inflation would "be fairer, while it would still allow pensioners to benefit from improvements in living standards".
The report pointed out that the replacement rate for state pensions in the UK is one of the lowest in the OECD.
Gross pension replacement rates show the level of pensions in retirement relative to earnings when working.
However the report added that some pensioners have significant assets in occupational pensions and/or in housing.
Pegging state pensions to average earnings, instead of inflation, would mean savings for flanking policies to head off poverty risks that would benefit pensioners with no or low assets, the report stated.
Under the current triple lock system, the state pension increases each year in line with whichever is the highest: consumer price inflation, average earnings growth or 2.5 per cent.
Next year, the state pension will go up in line with consumer price inflation, which hit 3 per cent in September.
In its manifesto for this year’s snap election, the Conservative party proposed scrapping the 2.5 per cent lower limit after 2020.
However, following the election results, the government was forced to abandon this idea in order to secure parliamentary support from Northern Ireland’s DUP, which disappointed the pensions industry.
On the self-employed, the OECD said that the differences in state pensions and contributory welfare benefits “have been reduced with recent reforms, as self-employed workers build up the same entitlements to state pensions as employees since 2016”.
The report said: “To improve fairness in tax policy and reduce risks for the financing of the social insurance system, the authorities should gradually reduce the gap between national income contributions for self-employed and employees.”
Chancellor Philip Hammond attempted an increase in self-employed national insurance in this year’s Budget statement, but was forced to reverse his decision, as the Conservative party had promised not to raise taxes in its 2015 election manifesto.