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- The Reformer Blog
16 June 2016
By now, almost every area of domestic policy has been sucked into the EU referendum’s political vortex. Last weekend it was the turn of the State Pension. According to the Prime Minister, the triple lock – which ensures the State Pension rises each year in line with the highest of earnings, inflation or 2.5 per cent – “could no longer be guaranteed in the long term” if we left the EU.
David Cameron’s comments need to be read within the confines of the current political climate, but this development is welcome. It is the first signal from leaders of the Conservative Party that the triple lock might be abandoned ahead of the 2020 general election. While working-age people have faced steep welfare cuts in recent years, this measure has extended disproportionate generosity to pensioners – a segment of society that is now more affluent than average. The sooner this inequitable policy mix is remedied the better.
Regardless of the outcome of next week’s vote, the question of how we deal with the fiscal challenge of an ageing society will soon demand the Government’s attention. In the last Parliament, the Chancellor committed to linking the State Pension age (SPa) to life expectancy. Early next year, former Director General of the CBI John Cridland will publish an independent report on changes to the retirement age beyond 68. The Government is legally required to respond by May.
Given individuals consistently underestimate how long they will live, public anxiety about increases in the age at which people are eligible for the State Pension is understandable. However the SPa is only on an upward trajectory because life expectancies are on the rise. On the current path, the SPa will surpass 70 by the 2050s. Even so, the proportion of life men can expect to spend receiving payments will hold constant at around 18 per cent. To put this figure in historical context, the average man died before reaching retirement in 1947. When Lloyd George first introduced the State Pension in 1909, the SPa was set at 70 while life expectancy was below 50.
For women, the future is less benign. Over the next five years, equalisation of the SPa for men and women will see a decline in the proportion of life women will spend in retirement. Still, few can argue with this direction in policy, and given their better health, women can expect to receive the State Pension longer than their male counter parts.
The UK is not alone in facing the challenge of financing universal pensions for a growing number of retirees. But other than increasing the SPa, governments can only pull two policy levers: cutting the generosity of benefits or maintaining the SPa through additional borrowing or taxation. Pensioners are less able to supplement their income through work, so any absolute cut to benefits would be undesirable. Neither is the second option an attractive proposition. With our ageing society driving up expenditure on the NHS and pensions, the Office for Budget Responsibility has judged the UK’s finances to be unsustainable in every year since its exception. Burying our heads in the sand and piling yet more longevity risk onto future generations is not the way to respond to this problem.
Of course, increasing the SPa will not be painless either. If people are expected to work into their late 60s and 70s, the Department for Work and Pensions will need to think harder about how to support the employment of older people. But it is simply alarmist to say increasing the State Pension beyond 68 would be tantamount to ‘work ’till you drop’. Like all matters of public policy, the Government faces a trade-off. Increasing the retirement age appears to be the best way to protect our most vulnerable pensioners, both today and tomorrow.
William Mosseri-Marlio, Researcher, Reform