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- The Reformer Blog
12 April 2017
But highlighting the future cost of the State Pension wasn’t the only difficult argument that John Cridland, the report’s author, made. The former Pensions Minister Ros Altmann, PwC and others have recently urged the Government to back a more flexible approach to the State Pension. One version of this idea would see everyone given a notional sum of money, which could then be converted into an income stream during a ‘retirement window’. This intervention would give individuals greater choice over the date at which they retire, but early access to the State Pension would see annual payments fall.
The concerns motivating these arguments are well placed. Although life expectancy is on the rise in the UK, these benefits have been unequally spread. A boy born today in Deansgate, Manchester, can expect to live past his 85th birthday. In nearby Victoria, however, male life expectancy at birth stands at just 70.2.
By tying the retirement age to increases in life expectancy, therefore, policymakers appear to have delivered a double blow to those on low incomes. Not only will low earners spend proportionately less time in receipt of the State Pension (because life expectancy and incomes are correlated). Longevity is also linked with employment outcomes in later life, meaning that it will be harder for these individuals to sustain themselves up to the retirement age.
People can already choose to ‘defer’ their State Pension and receive higher annual payments as a reward, so there is a certain amount of symmetry to these proposals. Nevertheless, Cridland was right to counsel against additional flexibility.
First, the distributional case in favour of ditching a universal retirement age doesn’t stack up. Analysis from the Pensions Policy Institute suggests that a 20-year-old woman in the lowest income decline will pay just £0.28 for every pound she receives in State Pension income. For men in the top income decline, however, the figure is £0.92. In other words, the current system appears to be able to reconcile the systematic variations in life expectancy that the UK currently experiences.
Second, any policy that increases the State Pension’s complexity should ring alarm bells. In the 1990s and 2000s, the Department for Work and Pensions struggled to communicate relatively simple changes to the pensionable age for women, prompting a significant battle when these measures came into force. Moreover, what flexibility there is in the current system is poorly understood. One third of those approaching retirement are not aware of the deferral option, while there appears to be little evidence that this intervention – which is designed to support employment outcomes above the State Pension age – is effective.
Third, the challenges in communicating the idea of a ‘retirement window’ would likely lead to shorter careers. Given individuals prefer consumption now to consumption tomorrow, the temptation to access this sum of money at the earliest possible moment would be significant. Not only is this bad for the state – shorter working lives will lead to lower retirement incomes, and therefore a greater reliance on means-tested benefits. There is also evidence to suggest employment in later life drives positive health outcomes.
Building flexibility into the retirement age is unlikely to help the UK meet the policy challenges posed by our ageing population. Cridland was right to make this unpopular argument in his report – it’s now up to the Government to hold firm.
William Mosseri-Marlio, Research Manager, Reform