Research and analysis

Long term projections of pensioner benefits: background and methodology

Updated 21 November 2018

Background

The Office for Budget Responsibility (OBR) published long-term projections of pensioner benefit expenditure in their Fiscal Sustainability Report 2018 on 17 July 2018.

This note and the accompanying tables update the Department for Work and Pensions (DWP) projections of long-term pensioner benefit expenditure.

These are illustrative projections, in that they are designed to show the overall fiscal sustainability of benefit policy, as it stands at 2022 to 2023 (the end of the current medium-term forecasts), along with any future changes to benefits that have been announced at or before the 2018 Spring Statement, under a particular set of reasonable assumptions.

The projections show a broad path of expenditure over the next 50 years; results for any particular year will, in practice, be affected by cyclical factors in the economy and other areas, which it is not possible to predict, so the actual figures are expected to fluctuate around the trend shown.

Tables LT1 and LT2 assume that disability benefits (Disability Living Allowance, Attendance Allowance and Personal Independence Payment) will continue to be uprated in line with consumer prices over the long term and that Winter Fuel Payments and Christmas Bonus will continue to be fixed in cash terms.

The OBR assume that over the long term, expenditure will grow as if these benefits were uprated in line with growth in earnings. These assumptions are used in tables LT3 and LT4, which are consistent with the Fiscal Sustainability Report.

The projections shown are for the United Kingdom and overseas, unlike DWP’s medium term forecasts, which exclude Northern Ireland. Read the latest medium term benefit expenditure tables.

Methodology: summary of key assumptions

These assumptions are consistent with the OBR’s approach in the Fiscal Sustainability Report 2018, except for the uprating assumptions in tables LT1 and LT2.

Demographic trends

Underlying all of the individual benefit projections are the Office for National Statistics (ONS) 2016-based population projections. As with the Fiscal Sustainability Report central projection, the principal variant of the ONS population projections is used here.

Economic assumptions

Labour market and productivity assumptions used in these projections are consistent with the Fiscal Sustainability Report and the OBR’s Economic and Fiscal Outlook March 2018.

Changes to State Pension age

The projections assume a State Pension age timetable consistent with the Fiscal Sustainability Report assumptions, and based on the recommendations of the State Pension age review published in July 2017. It is assumed that State Pension age equalises at age 65 for men and women by November 2018, and increases to:

• age 66 by October 2020
• age 67 by between 2026 and 2028
• age 68 between 2037 and 2039

Subsequent State Pension age changes are linked to life expectancy and assume that State Pension age is set such that people spend on average up to 32% of their adult life in receipt of the State Pension. Under this assumption the State Pension age increases to age 69 between 2052 and 2054.

Note that the State Pension age timetable used for these projections is not the same as the currently legislated State Pension age timetable.

Read information about the legislated State Pension age timetable.

Read information on the 2017 State Pension age review.

State Pension

The State Pension projections are largely driven by demographic trends – the numbers reaching state pension age each year and the mortality rates.

Both basic State Pension and new State Pension are assumed to be uprated by the “triple guarantee” (highest of average earnings increases, Consumer Prices Index (CPI) inflation or 2.5%), and it is assumed that on average this means increases of 0.36 percentage points per year above average earnings. State Second Pension is uprated by CPI when in payment, but by earnings during the accrual phase.

Pension Credit and Housing Benefit

These are modelled using DWP’s long-term dynamic simulation model, Pensim2. Average earnings inflation is used to uprate the Pension Credit Guarantee level.

The mean weekly rent eligible for housing support is assumed to grow in line with average earnings.

The owner-occupation rate for pensioners is assumed to remain high over the 5 year horizon of the medium term forecasts as the peak levels of working age owner-occupation seen in the mid-2000s continue to feed through into older age groups.

In the longer term today’s working age cohorts are assumed to reach lower rates of home ownership in retirement, particularly those now aged over 40, giving a profile in which the rate of home ownership for pensioner households falls from around three-quarters now, to two thirds by 2050, before rising back to around 70% in the very long term, where it is assumed that current cohorts of younger workers in their 20s and 30s will reach slightly higher rates of home ownership.

Disability benefits

The projections for Attendance Allowance, Disability Living Allowance and Personal Independence Payment assume that after the medium-term the proportion of remaining life after age 65 spent receiving these benefits remains constant. Under this assumption, the per head rate at any given age falls over time due to increasing life expectancy.

Other pensioner benefits

Winter Fuel Payments in tables LTP1 and LTP2 are assumed to remain at their 2021 to 2022 level (£200, with an additional £100 for those over 80) throughout the projection period, as is Christmas Bonus (£10). Tables LTP3 and LTP4 assume that over the long term expenditure will grow as if these benefits were uprated in line with growth in earnings.

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