- Our Work
- The Reformer Blog
23 February 2018
This week, letters landed across the country informing pensioners that they are to receive a 3 per cent increase in their state pension, the biggest in six years. The state pension already accounts for £92 billion of government spending, with its ‘triple lock’ uprating costing an estimated £6 billion per year. This is all funded out of general taxation.
Trends are making this system unsustainable. Today, four workers pay for every pensioner, but by 2040 there will be on average 2.5 workers per pensioner. It is little surprise therefore the Treasury has been warned by the Government Actuary that “if the system is to continue to cover the current form of State Pension and other benefits, then either the Fund’s income has to rise or expenditure has to be controlled.” This leaves a tough choice for government: increasing taxes makes it harder for individuals to save for retirement, whilst more borrowing only defers the decision to another generation.
But there is another way. Government can reinvigorate private pensions. One way the Department for Work and Pensions (DWP) is doing this is through workplace pensions which get younger workers immediately investing in their later years. This is crucial with 38 per cent of workers not saving enough for retirement.
Pensions Minister, Guy Opperman MP, wrote last week of “the problem of 4.8 million self-employed people under-saving for their retirement.” This requires the DWP needs to go further and make an offer to the self-employed who are not currently auto-enrolled onto workplace pensions.
This also affects a further 1 million and counting ‘dependent contractors’ like Uber drivers, for example. In response to this, the government could encourage gig firms to auto-enrol workers into a HMRC-sponsored pension scheme where the firm pays a percentage of the worker’s total wage into a pension, encouraging them to remain invested in the pension scheme. The rise of the gig economy also means less employer National Insurance Contributions for the state pension fund.
Government has recognised as much by raising the state pension age to 66 in 2020, 67 by 2028 and 68 by 2039, following the recommendations of last year’s independent review of the state pension age. Sir Steve Webb, former Pensions Minister, described this move as something governments should have “started a lot earlier.”
Deeper reform is needed to make the model sustainable. This demands updating public and private pensions, not replicating the same faults of the current system. Previously, Reform has argued that the triple lock should be replaced with an earnings link. This would peg state pension increases to a proportion of average wages in the medium term, removing a minimum 2.5 per cent rise. This is not a threat to pensioners who have seen their incomes triple over the last four decades, whilst only doubling for workers.
Letters will continue to arrive informing pensioners of their state pension increases. The challenge is how to fund a decent retirement whilst balancing demands on the exchequer. An important option for reform is expanding workplace pensions to cope with a modern economy.
Daniel El-Gamry, Researcher, Reform