By Fiona Tait, Technical Director, Intelligent Pensions
• Reduce the amount of the pension payable, or
• Increase the SPa so that income is paid out for a shorter time, or
• Pay it to fewer people.
Each of these tactics has been used before. When the state pension was first introduced, in 1909, it was flat-rate and means-tested, meaning that not everyone received it and those who did had to wait until age 70.
Over subsequent decades, and against the background of a growing welfare state, the state pension became universal and contribution-based rather than means-tested and the SPa was reduced to 65, and then 60 and 65 for men and women respectively.
More people received the state pension, and they received it earlier which was all well and good but has led us to the current position where the cost of providing it has increased from around 3.5% of GDP up until the 1990s, to 4.8% in 2021/22 and a forecast of 6.2% in 2049/50 .
Triple lock
It is unlikely that any government would want to reduce the absolute value of the state pension, however they could achieve the same effect by reducing the increases so that the value decreases over time. The current triple lock is already under scrutiny and the earnings element was famously ‘suspended’ for this year. To be fair, the latter was more to do with the odd earnings patterns created by the pandemic, however the lock was originally put in place at a time when it was generally accepted that pensioners’ income was not keeping up with that of younger people. We are now in a position where ‘inter-generational fairness’ is higher up the agenda and it wouldn’t be much of a surprise if the lock is amended or replaced after the next parliament.
SPa changes
One of the questions in the CfE is whether it is reasonable for people to expect to spend a fixed proportion of their adult life in receipt of a state pension. Recent figures suggest a slow down in the rate of increase in life expectancy, however there are 2 very strong arguments as to why SPa still needs to increase.
Firstly, life expectancy for a 65-year-old male has already increased from 13.5 years in 1948 when the SPa was reduced to 60/65 to 19.9 years in 2022, and secondly declining birth rates and increasing numbers reaching age 65 mean that the dependency ratio continues to fall. The latter of course is a major factor in a system where, contrary to popular belief, income payments are funded from current and not historical national insurance contributions (NICs).
It seems likely that we still have catching up to do if the state pension is to be paid for the same fixed proportion of life as it was in 1948. Increasing the SPa will not be popular, particularly in light of the regional variations in life expectancy and healthy life expectancy among different demographic groups and geographical areas.
Means-testing
Since 1909 we’ve gone through a cycle of increasing and then gradually decreasing entitlements, and the re-introduction of a flat rate pension, which makes me wonder if the next step is to go right back to the 1909 model and re-introduce means-testing. This would of course suit the ethos of a socialist government, and should they get into power they may well be able to sell the idea to the electorate. The controversial image of well-off WASPI women taking first class train journeys and quaffing champagne on the way to Westminster could certainly be used to by those who support this line of thinking, and it would certainly cut costs if fewer people were to receive it.
Summary
It would of course be possible to use a combination of approaches, such as allowing early access for certain people based on financial or health factors.
The main objection to this, apart from voter outrage, is that it would re-introduce complexity and uncertainty, making it much harder for individuals to obtain a realistic projection of their expected benefits. The major advantage of the new state pension introduced in 2016 is that it is much simpler for people to understand.
Taking all of this into account, there remains a strong message for current workers – the state pension is intended to be an underpin and it is unlikely to look the same as it does now for those retiring more than 5-10 years ahead. Take the government’s advice and ensure you make the most of opportunities to build up private pension savings, either via automatic enrolment or an individual plan of your own.
*Independent Review of State Pension Age – Call for Evidence
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