When George Osborne used his Autumn Statement to announce a new formula linking state pension age with life expectancy – bringing forward an already planned pension age rise by a decade – the news was filled with eye-catching headlines about working until the age of 70.
It was an attempt to draw a line under a persistent issue: how to pay for a pension bill that is only going to grow. But legislation that stretches so far beyond the current parliament will always be on shaky ground. And with the free market Institute for Economic Affairs (IEA) already calling for the move to later retirement ages to be accelerated, can we really plan for retirement with any certainty?
How long will you have to work?
The formula introduced in the autumn statement is an attempt to relieve politicians of the responsibility of raising the state pension age – always an unpopular move – and put it in the hands of demographers and accountants.
Under the formula, those currently aged 59 and under will retire at 65-66 depending on birthday. Those under 52 will retire at 67. People in their mid-40s will retire at 68, and those in their mid-30s at 69. And of course, the headline rate: people currently in their 20s are projected to retire at 70 – the biblical life expectancy of three score and ten years.
The government has published a retirement age calculator to provide personal results based on age and gender.
Is the pension age rise fair?
Sowing so much uncertainty is obviously not something politicians do lightly. It’s safe to say no one is jumping for joy at having to work longer. And bringing forward the age rise sends the message that these rules can be changed at any time. So is it at least fair?
Its necessity is in no doubt. The state bill for retirement benefits (including but not limited to the state pension) accounts for £111bn of the £202bn welfare budget – more than half. The ageing population means there is a relatively smaller pool of NI contributions to pay for lengthier retirements – a state of affairs set to worsen with time. That the retirement age should increase in line with life expectancy is self-evident.
But fairness is another question, and one the government is keen to ignore. Rising inequality in the UK has led to a parallel disparity in life expectancy across regional and professional lines.
As might be expected, there is a pronounced North – South divide. The average male expectancy in East Dorset is 8.9 years longer than in Blackpool, broadly in line with economic inequality.
To put it bluntly, poorer people live shorter lives. And during that lifetime, they have less disposable income to put aside for retirement. As the pension age increases, the greater the chance they will never see the bottom of their pension pot. Faced with a shorter retirement, they may as well have spent the money while they could, rather than saving. This affects quality of working-age life as well as retirement.
Nick Clegg defended the rise as merely in keeping with the accepted rule of thumb that a third of our lives be spent in retirement. For great swathes of the population, raising the pension age violates this rule with impunity.
So what next for the state pension?
Clearly the pension problem is far from solved. A more nuanced application of pension age would be expensive. It would raise administration costs, and unequal life expectancies makes a huge saving on overall pension spending. It’s easy to see why the government would like to avoid it, but the inequality issue is unlikely to remain muted for long.
The flip-side to savings is increasing funding from the working population. A hike in National Insurance contributions is clearly untenable. In this context, the Auto-Enrolment Workplace Pensions scheme is welcome in encouraging worker contributions, easing some of the state pressure. But it doesn’t go far enough alone. A pension pot of £633,000 is needed on top of the state pension for even a modest retirement lifestyle, something that won’t be achieved by AE alone.
Even with the changes, we are clearly far from filling the funding gap, so it’s easy to see why the IEA is calling for raising the pension age faster. But the pension age can’t rise ahead of life expectancy – the rate of increase of which is slowing down. East Dorsettians would cry foul whilst Blackpoolians could be rewarded with little more than a two week holiday for a lifetime of work.
The need for grander solutions will become more pronounced as time passes. Whatever these solutions are will be unpopular, and in all likelihood, unfair. The only thing we can expect with any certainty is a continuing culture of changing the rules on state pensions.
When will you retire? You’ll probably only be sure when you’re already spending Tuesdays at your allotment.