The UK should scrap its so-called “triple lock” protection for state pension benefits, according to the Organisation for Economic Co-operation and Development (OECD).
In a wide-ranging report into the prospects for the UK’s economy as it negotiates an exit from the European Union, the OECD said linking the state pension purely to wage inflation would share the burden of fiscal consolidation more broadly across society.
“Indexing the state pension solely to average earnings would be fairer, while it would still allow pensioners to benefit from improvements in living standards,” the OECD said.
“The replacement rate for state pensions is one of the lowest in the OECD, although some pensioners have significant assets in occupational pensions and/or in housing,” the organisation added. This meant that pensioners “with no or low assets should benefit from flanking policies” in areas such as workplace pensions.
The triple lock was introduced by the UK’s coalition government of 2010-15, and promises to raise the state pension annually by the highest of inflation, average earnings, or 2.5%.
In its manifesto for this year’s snap election, the ruling Conservative party proposed scrapping the 2.5% lower limit after 2020. However, following its poorer-than-expected showing at the polls, it was forced to abandon this idea in order to secure parliamentary support from Northern Ireland’s DUP.
The other main political parties all pledged to maintain the triple lock.
John Cridland’s extensive review of the state pension system, which published its final report in March, also recommended cutting back on the protections for the state pension.
The OECD also recommended increasing National Insurance Contributions (NICs) for self-employed workers. NIC payments determine an individual’s entitlement to the state pension and other benefits.
Chancellor Philip Hammond attempted an increase 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.
“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,” the OECD said.
Elsewhere in the report, the OECD said exiting the EU would “likely have financial stability implications” for the UK. It highlighted potential complexities and costs if financial services companies sought to relocate away from the UK.
“Stress tests should be used to assess financial stability and macroeconomic consequences of different outcomes,” the organisation said. “Stress tests are frequent, conducted once a year, and a careful monitoring of risks needs to continue before and in the wake of Brexit.”
The OECD’s economic survey of the UK is available here.