Why are state pensions linked to price
inflation and not salary inflation?
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Once upon a time state pensions were increased each year by the
rise in salary inflation. The conservative government broke this
link in the 1980's and replaced it with a link to price inflation.
Salary inflation is generally 1% to 3% per year higher than price
inflation.
Many people campaign these days for the link to be restored but
the financial pressure on the state pension system is already so
high that restoration of the link with earnings would only worsen
the situation. It can be hard to imagine how a few percent here and
there can make so much difference. However if the state pension was
linked to salaries rather than prices then it would be expected to
be around twice the level it would otherwise be after only 35 years!
That's a pretty big difference, don't you think?
There are arguments both for restoring the salary link and
retaining the link to price inflation.
In favour of restoring the link to salary inflation are that
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pensioners should share in the
real economic wealth of the nation. i.e. If wages are rising then
pensioners should share in this growth in national wealth.
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tax revenues (and hence the
money needed to pay pensions) rise with earnings and so the payments
out of the system should rise to the same extent
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the percentage of peoples salary at retirement covered by the
state pensions will reduce over time without a link to salaries.
On the other side of the argument is generally that it will cost
an awful lot more than it does at present.
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