Time for dynamic solutions to the state pension
When it comes to pensions spending, it's fair to say there are plenty of conflicting reports circulated within the media. On one hand, we read about a five-fold rise in pensioner poverty since 1986, whilst on the other, it is widely stated that today's pensioners enjoy a level of wealth which is outstripping younger generations.
A central pillar of this debate is the state pension, and again, analysis tends to be mixed. The generous ‘triple lock’ is synonymous with the apparent soaring costs of this form of welfare, while at the same time it is often pointed out that state pension payments to UK pensioners, at 16 per cent of average earnings, are the lowest in the developed world.
It is against this divisive backdrop that the influential Centre for Social Justice (CSJ) published a paper lobbying for the state pension age to be increased to 70 by 2028, and then 75 by 2035. This would represent a radical shift compared with what is currently in plan, which will see the state pension age rise to 67 by 2028, and 68 by 2046. The CSJ cites the benefits of later-age work as 'improving health and wellbeing', which would dovetail with a bounce for the economy (an extra £182bn per year by 2035, according to the think-tank’s estimates).
So is this proposal a sensible response to the pressures being placed on the public finances by an ageing population? Or a cruel idea to shift the goalposts for the elderly?
Understanding the cost of the state pension
The deficit has been an ongoing issue over the past decade, and the impression is that the state pension has been consuming a soaring share of Government spending. According to the Office for Budget Responsibility, this is certainly true in cash terms, with the total cost rising from £53.7bn in 2006/07 to £91.6bn in 2016/17. By 2023, it is estimated that this figure will be in excess of £110bn.
As a share of GDP, this corresponds to 3.6 per cent for 2006/07, and 4.6 per cent for 2016/17. However, the ONS estimates that, under the current plans for state pension age increases, this figure is set to rise to 6.1 per cent by 2045/46, which is indicative of the strain being put on the public purse.
It is often claimed that the UK state pension - currently set at a maximum of £168.60 per week - is miserly compared to continental Europe. Widely-shared statistics put the maximum state pension for France at roughly double this amount, while in Spain and Germany, it is alleged to be the equivalent of over £500 per week.
Such comparisons are, however, far too simplistic, given the vast variances in how the systems work, and also the cost of living in each country. Germany doesn't even have a maximum (or minimum) state pension. All three nations also use complex formulas based on previous earnings to determine the state pension amount an individual is due, unlike our flat-rate system. UK pensioners also enjoy additional benefits such as winter fuel payments and free prescriptions, which aren't typically factored in. Furthermore, such calculations do not consider other pensions spending, such as pension credit, or the cost of providing pension tax relief.
A better way forward
That said, if there is one thing we can learn from our European counterparts, it is that our system could be far more imaginative, and a flat-rate approach is no longer fit for purpose. As former pensions minister Ros Altmann wrote in This is Money, our state pension does not take into account variables such as life expectancy in deprived areas, which is consistently lower than wealthier regions. So too is the life expectancy of those whose careers involve physical labour.
Rather than forcing people to work longer, she suggests the system should better incentivise it. The baroness also puts forward the idea of a more-flexible retirement age, enabling those who started work at a younger age to be entitled to a state pension earlier. Additionally, those with health problems, or who take on unpaid carer roles could draw down a reduced state pension from a younger age.
There is another significant gap in the CSJ proposals which begs tough questions. While it is true that some older Brits wish to work for longer, the fact is that, with age discrimination endemic in many workplaces, most of those who would be obliged to do so will not be able to find gainful employment. Rather than put the cart before the horse, surely it makes sense to incentivise employers to hire older workers, and invest in re-training programmes to upskill them, before moving the finish line further away?
And all of this, of course, comes off the back of the controversial change to the state pension age for women – 4 million of whom had to wait an additional six years to receive this benefit. At best, the implementation of this policy change to bring the state pension age for women into line with men left a lot to be desired, and was poorly communicated.
Facing up to the future
For all the uproar, the CSJ report does at least spark vital debate, and awaken us to the fact that the status quo can no longer endure. Although life expectancy has plateaued in recent times, it has rapidly outstripped the pension age over the past century. Clearly, for the government to run the public finances sustainably, the state pension system needs to keep pace with this – not to mention the fundamental shift in age demographic of our population.
But none of it will be solved by a simplistic straight-line correlation between national life expectancy and a mandatory retirement age, and it is high time for a more dynamic approach. Looking at the metric of region alone illustrates this point starkly. According to the ONS, there is a full 10-year difference in life expectancy between someone living in Glasgow versus someone who resides in Kensington and Chelsea. And this doesn’t even factor in the proportion of years that are lived in good health, which again, are biased in favour of those in affluent areas, who invariably enjoy access to higher-quality healthcare, housing and food.
At a time when politicians must deal with diminished trust and goodwill from the public, delivering the shake-up the state pension system so desperately needs will not be easy. But it is a challenge which cannot be shied away from, and tribal lines must be set aside so as to engineer clear, fair and well-researched solutions. Ditching the one-size-fits-all concept of a retirement age, and formulating a flexible strategy which gives due weight to factors such as geography, health, life expectancy and years of NI contributions would represent a good start.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?