How did increasing the state pension age from 65 to 66 affect household incomes?

Abstract

Key findings1 The biggest impact on incomes of the increase in the state pension age from 65 to 66 is simply that 65-year-olds lost -on average -state pension income worth around £142 per week in 2020-21. This reduction in state pension income was much larger than the overall increase in earnings arising from around 9% of 65-year-olds delaying their retirement until they reached the new state pension age.2 Accounting for all forms of income, including state pensions, earnings, other benefits, private pensions and investment incomes, the increase in the state pension age pushed down the net income of 65-year-olds by an average of £108 per week. This is an average, and many will have seen bigger reductions in their incomes, while those who remained in full-time work as a result of the reform actually received a higher total income than if the state pension age had remained at 65.3 The reduced payments of state pensions -and the higher direct tax payments resulting from the increase in the state pension age -boosted the public finances by around £4.9 billion per year. This is the counterpart to the reductions in household incomes caused by the reform. This exchequer gain is equivalent to around ¼% of national income and almost 5% of public spending on state pensions. 4 The reductions in household incomes have had a particularly important effect on lower-income households: they have caused significant increases in income poverty rates among 65-year-olds. The reform caused absolute income poverty rates (after accounting for housing costs) among 65-year-olds to climb to 24%, some 14 percentage points higher than -or more than double -the 10% that we estimate it would have been had the state pension age remained at 65.

Challenges for the UK pension system: the case for a pensions review

“…Evidence shows that a significant number of women and men responded to the reform by delaying their retirement (and thereby typically boosted their earnings by more than the state pension they will have lost). It also shows that the majority did not adjust their labour market activity in response to the reform and therefore the reform reduced their weekly income -typically by a bigger share among low-and middle-income households who are usually more reliant on the state pension (Cribb, Emmerson and O'Brien, 2022;. More generally, the significant increases in the real value of the state pension over time, and reductions to the generosity of the working-age benefit system, have made the state pension age increasingly important as a point when financial circumstances change.…”

Pensions: five key decisions for the next government

“…OBR forecasts prior to the 2019 general election suggested the triple lock would cost nothing increased spending by £0.9 billion per year. The more volatile are earnings and inflation, the more the triple lock would push up the value of the state pension, and the more it would costsince its introduction, the state pension was indexed in line with 2.5% in four out of 14 years, and in line with inflation in six out of those years (Cribb et al, 2023c). The triple lock therefore creates uncertainty for both the level of pension (compared to average earnings) and for the public finances.…”

“…work up to (a rising) state pension age. Previous IFS research(Cribb and O'Brien, 2022) shows that the increase in the state pension age from 65 to 66 increased the income poverty rate of 65year-olds by 15 percentage points. Concerns about low living standards below state pension age have been raised by various groups(Phoenix Insights, 2023; Fabian Society, 2024).One reason for this issue is the large gap in basic state support available to those out of paid work above and below state pension age (Figure3).…”