The Minister for Social Security is proposing a new method for uprating old-age pensions, which will be debated by the States early next year.
The new method will continue to peg the medium to long term growth in pensions in line with the growth in average earnings whilst guaranteeing a minimum rise in any one year in line with the increase in the cost of living for pensioners.
Currently pensions are uprated each year in line with the growth in average earnings which has, over the long term, resulted in significant growth in the value of pensions relative to the increase in the cost of living and seen the purchasing power of pensioners grow accordingly. This policy provides a direct link between the increases received by pensioners and the average rise in the earnings of the working population who pay for current pensions, through their contributions into the Social Security Fund.
However, in four of the last five years, prices have risen faster than wages, and both workers and pensioners have seen a fall in the real value of their incomes.
Following the rise of 1.5% in October this year, Senator Francis le Gresley made a commitment to review the method of calculating the annual increase . After discussions with fellow ministers, his department will now be drawing up detailed plans to protect the value of the old-age pension in future years.
Senator Le Gresley explained: “ I am very aware of the difficulties that many pensioners have faced during the protracted economic downturn. I hope that pensioners will be reassured by these proposals which guarantee that future pension increases will always at least match the rise in prices during the year, whilst still enjoying increases in line with the earnings index in the long term.
“At the same time, I am responsible for maintaining the long-term sustainability of the Social Security Fund, which is under threat from the impact of the ageing population. In the future contributions from workers will need to fund the pensions of far more pensioners. The “triple lock” mechanism rejected by the States earlier this year was very expensive as it would have led to pension costs increasing year on year. In contrast, my new proposal limits the increase in costs in the long-term.
“The scheme gives a firm guarantee to pensioners that their pension will always match the increase in prices during the year. The Social Security Fund will bear the extra cost in those years. In other years when the economy is doing well and wages are rising faster than prices, pensioners will receive an increase that is always above the increase in prices, and in the long term will match the long term rise in earnings.
“By smoothing out the increases in pension rates, we can ensure that the long-term cost to the Fund is sustainable.”
The Minister went on to say “We have more work to do to make sure all the details of the scheme are fully worked out, but I expect to be able to lodge a proposition early next year. If the States agree, this would lead to an immediate rise in the rate of the old-age pension, probably in April 2013. The increase will bring the value of the pension in line with the increase in the RPI (pensioner) from June 2012, which will be an additional 1.4% on top of the 1.5% that has already been provided.”
Future annual increases will be decided as follows:
• If prices have risen faster than wages, the pension will be increased in line with prices (RPI(pensioner)).
• If wages have risen faster than prices, the pension will be increased at least by the midpoint between the two rates, up to a maximum of the growth in wages. The exact value of the increase will depend on the long-term position of the pension index against the earnings index.
By matching the long-term increase in pensions with the long-term increase in earnings, the additional cost to the Social Security Fund of providing this protection will be kept to a minimum.
Further details of the scheme will be published in early 2013.
Category: Finance & Business