The RSS RPI/CPI user group committee met with the Johnson Review Team on 28th November. At that meeting Paul Johnson expressed interest in an empirical comparison of price indices and actual historic household expenditure. I offered some thoughts on how this could be done and was asked to prepare note which I have placed in the library.
The note concentrates on how to get the data to compare price indices with household expenditure. There are a couple of brief paragraphs in the introduction on why such comparisons are important which are copied below.
The long term behaviour of price indices has always been important with, for example, long term benefits such as those for the disabled. However, the introduction of average salary pension contracts based on price indices adds another dimension to the problem. For example, teachers entering the work force in their early twenties and eventually dying in their nineties could be subject to such a contract for a period of 70 years or so. Contractual arrangements, particularly in the private sector, are more difficult to change than state benefits if the evidence suggests it becomes necessary.
A comparison with expenditure is important because that is related to how people can take part in society - social inclusion. There are technical issues with the construction of price indices such as the concept of constant quality. There are also conceptual issues. None of this argues for uprating to match the change in household expenditure which includes the effect of other elements notably the rise in the standard of living. It argues for the need to understand the relationship between price indices and expenditure both conceptually and empirically from the perspective and experience of households and individuals.
Something that I - and probably the Review Team - would find useful is if anyone knows of similar empirical research that has been carried out into the long term relationship between price indices and actual expenditure by households and individuals.
In a sense this is an attempt to provide one potential answer to my question asking if anyone knows of any "similar empirical research that has been carried out into the long term relationship between price indices and actual expenditure by households and individuals".
I placed the following note in the library in July 2012 on pension adequacy - Pension adequacy and its implications for the suitability...
The note used the pension adequacy concept from the Turner Commission quoted by Hutton in his review of public sector pensions.
I was unable to find a copy of the Turner Commission reports - references below - so was unable to take my analysis further.
I do not know what Turner based his pension adequacy upon but it seems plausible that it was some sort of an assessment of expenditure rather than income. If it is based upon expenditure it will have an emphasis on pensions but it may provide a methodology which might offer a useful contribution to the Johnson Review.
Does anyone have copies of the Turner Commission reports or know of how pension adequacy was put together?
Wishing you all a Merry Christmas.
Pensions Commission (2004), Pensions: Challenges and Choices - The First Report of the
Pensions Commission (2005), A New Pension Settlement for the Twenty-First Century - The
Second Report of the Pensions Commission
I have had a first look at the reports of the Turner Commission - there is a great deal of material. What follows is necessarily from the perspective of pensions but there are potential reads across into other contexts where long term price indexation is a factor.
The Turner Commission propounded the concept of pension adequacy. However they largely limited themselves to a static concept of adequacy at the point of retirement.
In contrast I would suggest a key concern of Paul Johnson's review should be the long run dynamics of concepts such as pension adequacy and how they are affected by the indices used for uprating. In my recent note for the review I argued for an approach based on individual and household expenditure.
The Turner Commission did consider pension adequacy in terms of expenditure patterns. They used the Expenditure and Food Survey for 2003 but seemingly only for that single year - First report, table 4.1. The Turner Commission also pointed to potential issues with indexation but did not appear to investigate them further.
First report, page 138: "The empirical data suggests however that the decline of relative real income during retirement may be more severe than theory suggests is optimal. Older pensioners have significantly lower income than recent retirees."
Pension "adequacy" is not a well-defined concept as Turner makes clear in Chapter 4 of the first report. However, the definition of pension adequacy is not critical if the primary interest is how such concepts are affected over the long term under different forms of uprating indexation. The indexation is not the only factor that will affect concepts such as pension adequacy - post retirement spending patterns can change with, for example, reduced mobility and frailty possibly eventually leading to needing to live in a care home. However the effect of uprating indices is very important in the long term and is probably one of the more tractable effects to isolate and quantify. Also with the advent of average salary pension contracts indexation will affect pensions as benefits are accrued while in employment as well as in retirement itself.
The note I posted in July 2012 mentioned in a previous post looked at how Turner's pension adequacy might be affected after retirement by the change of price indexation but is essentially a comparison with earnings rather than expenditure - Pension adequacy and its implications for the suitability...
To avoid readers ploughing through the large volumes of Turner's reports the sections that for me seem most relevant to the long term behaviour of price indices and expenditure of households and individuals are First report, Chapter 4 "Looking forward: pension adequacy if trends unchanged", Section 1 The philosophical issue: should government ensure "adequate" pensions?, and Section 2 The empirical issue: what pension level is "adequate"?; and Main report, Appendix A, Data adequacy to support evidence-based policy
Appendix A is useful because it provides a narrative on the various surveys and data sets that are available for pension analysis. The Johnson review team may find this a useful source but there should be similar surveys and data sets available for other areas such as disability benefits. It would be useful if a more extensive catalogue could be compiled by the review team not only for their own purposes but for future researchers. Members of the user group may be able to help with contributions to the catalogue from both the UK and elsewhere.
There is probably other relevant analysis in the Turner Commission reports and I cannot claim to have anywhere near thoroughly digested them. I have come late to the reports and I am sure others will have deeper knowledge.
Arthur Original Message: Sent: 20-12-2013 05:08 From: Arthur Barnett Subject: Long term behaviour of Price Indices and expenditure of households and individuals