Is the reindexing of pensions cheating our old folk?
A little while ago, when I took a look at how inflation is measured, we saw how there are two different measures of rising prices used by the government, and they differ slightly.
The older Retail Price Index (RPI) is being replaced in the UK by the newer Consumer Price Index (CPI). But why, and what's the difference? Well, it's mainly that CPI excludes a number of housing-related items -- like council tax, mortgage interest, and buildings insurance.
And that, together with differences in the way the two measures are calculated, means that CPI tends to come out a bit lower than RPI. Could that possibly be the reason why things like ISA allowances and pensions have been shifted to CPI-linking rather than RPI-linking?
What's the difference?
It will save the government money, certainly, but is it morally right to exclude some of the items that many pensioners, and almost all tax-paying ISA investors, will still be paying for? To answer that, we need to know the likely difference in the two figures, and a working paper just out from the Office for Budget Responsibility (OBR) has made it clear.
It appears that from 1989 to 2011, the difference in the two measures was around 0.7 percentage points a year, with RPI inflation being steadily ahead. That might not sound much, but when inflation is only running at a few percent (even now it's only just above 5%), it's actually is quite a difference -- especially when compounded over a couple of decades.
And the gap is getting wider. The OBR reckons that in the future, the difference will most likely double, with RPI running ahead of CPI by 1.4 percentage points. Let's assume average CPI inflation for the next 10 years of 3%, which would put RPI inflation at 4.4%. What difference would that make to the basic state pension of £102 per week?
Well, under the old RPI-indexed scheme, by 2021 it would have risen to £157 per week. But since the change of indexing to use CPI, it will only be worth £137 per week -- 13% less. Admittedly, there is some additional protection for pensioners, in the form of what is known as the 'triple lock' -- this guarantees the state pension will increased by earnings, CPI or 2.5%, whichever is the highest.
What do you reckon? Is the change to CPI indexing fair to pensioners, or should we have stuck to the old RPI measure? Do share your feelings, below.
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