Household Cost Indices (HCIs) could be a useful tool for protecting retiree living standards if income from public and private pensions and benefits rises at or above the pace of these HCIs, according to The Pensions Policy Institute (PPI).
According to the PPI’s published briefing note, ‘How do cost-of-living increases affect pensioners?’ which explores the impact of changes in inflation on pensioner households, pensioners are distinctly affected by inflation, as they tend to spend income on specific goods and services in different proportions than the general population.
The research found that recent economic events have resulted in a huge increase in the cost of living, particularly in the areas of housing and energy. These increases will disproportionately affect older and single pensioners, who spend more on these items than younger and single pensioners.
According to PPI, one possible approach is to correlate increases in pension income and benefits to the ONS’s Pensioner Household Cost Index which assesses how expenses rise for retiree households based on their average consumption.
PPI head of policy research Daniela Silcock says: “Cost of living rises are difficult for everyone, especially those with low incomes and low levels of savings to fall back on. Pensioners can be hit hard by cost increases in areas on which they spend more, such as housing, fuel, and energy. This is why recent increases which have affected energy costs particularly, and upcoming rises to energy caps, could result in many pensioners struggling to meet daily needs.
“The problem is compounded when pensioner income increases by less than the rise in the cost of living. While state pension and pension credit usually increase by earnings or above (the Triple Lock) in 2022/23 they are rising by the Consumer Price Index (3.1 per cent), which is lower than the annual cost-of-living increase in January 2022 as measured by the Consumer Price Index + Housing of 4.9 per cent. Pensioner income from earnings and private pensions may increase by a range of measures, including some price indices, but income from many annuities and from earnings is likely to remain level.
“This mismatch between income and price inflation can reduce pensioner standards of living, resulting in significant deprivation for those without extra savings or assets. One potential solution is to consider linking rises to pension income and pensioner benefits to ONS’s Pensioner Household Cost Index, currently under development, which measures how costs rise for pensioner households based on their average expenditure. In the meantime, the Government might wish to consider other, more immediate, measures for ensuring that rapid cost-of-living increases don’t lead to serious deprivation for some pensioner households.”
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