State pensions need a radical rethink, not just an age raise

If you were born since around 1970, the government has just proposed that you will not be able to get any state pension until you reach age 68.

Under the current rules, introduced by the Labour government, you would get the state pension from age 67 until 2046. This brings forward the increase from 67 by seven years, in order to control the rising costs.

The UK has a “pay-as-you-go” state pension system, in which younger generations pay for the pensions of older people and contribute into National Insurance in order to gain entitlement to their own pension in future. So it is clearly important to control state pension costs, in order to avoid placing excess burdens on younger generations.

Read more: Raising the state pension age mitigates the burden of our ageing population

Average life expectancy is rising and that is great news. However, the decisions around state pension age are not straightforward and are part of our national system of social retirement support. National Insurance amounts to a significant percentage of salary for most people, but anyone who does not live to the starting age for state pension will get nothing from this. Those who live longer, in contrast, will receive more from the state.

The announcement of a faster than expected rise reflects recommendations of John Cridland’s official review, which were based on forecasts of average longevity. No account is taken of the significant differences in life expectancy across the country, between social classes and also between occupations.

Of course, most people will be able to wait longer for their state pension. But what about those who cannot?

It is worth considering whether the state pension should be run on the current one size fits all approach, based purely on estimates of the “average”, or if it should it have some flexibility to account for individuals’ increasingly flexible lives.

A more flexible system would perhaps allow people to take their state pension at a lower age, either because they are seriously ill or because they have worked for more than 50 years already. People could be allowed to start their pension between ages 65 and 70, with the rate they receive being adjusted for early access. This would be fairer to the more disadvantaged and allow them a choice they are currently denied.

At the moment, the state pension is only flexible for those who are healthy and wealthy enough not to need to take it at state pension age. If you can afford to wait longer, you can get a higher state pension, but if you cannot manage until that age, it is just too bad.

It is true, as Cridland says, that there would be some difficulties in a flexible approach, but just because it is challenging does not mean the policy is wrong. There will be another pension age review in the next Parliament and I hope that will provide a chance to reconsider these issues.

I believe a flexible approach would be better than the proposal made by Labour that the state pension age should never rise from age 66. The cost of allowing everyone to get a full pension at 66 for decades to come would be too much of a burden on younger generations in our pay-as-you-go National Insurance system.

In general, we need to move away from the idea of just one “magic” age at which people should aim to stop working and live on a state pension.

A band of ages would accommodate the reality of twenty-first century retirement, which is that people will increasingly move from full-time work, to part-time work, before stopping altogether. The more we can encourage this kind of “pre-tirement” phase, the better it will be for our ageing population. Individuals who can work flexibly in later life can achieve higher lifetime incomes, can boost overall economic activity and could have more money to spend in their advanced older age to.

Finally, the current state pension system offers no help for social care. If Beveridge was designing our National Insurance arrangements today, he would surely make provision for care needs in advanced old age, rather than assuming that the only income for retirement the state needs to pay is a state pension.

Incorporating social care into National Insurance will offer an opportunity for the government to rethink state pension age and overall retirement provision and take account of individual needs.

The announcement yesterday is a step towards mitigating the funding shortfalls caused by an ageing population, but a more radical and comprehensive rethink is needed to confront the challenges of tomorrow.

Read more: The pension pitfalls of the gig economy

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