Raising the state pension age mitigates the burden of our ageing population

 
Ed Monk
Consumers Feel The Pinch With Christmas Around The Corner
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No one is going to rejoice at the thought of having to wait longer to get their state pension.

It’s still the case that the state pension is likely to form the lion's share of the retirement income for a majority of people – so delaying the age at which you get it is a serious step, and should not be embarked upon lightly.

In announcing further rises to the state pension age today – from 67 to 68 in 2037-39, seven years sooner than is currently legislated for – the government repeated the case laid out by Sir John Cridland for why such rises are necessary.

Read more: Government increases state pension age to 68 from 2037

Our ageing population means that, with no action, the amount we spend supporting people after work is going to rise dramatically, from 5.2 per cent of GDP to 6.2 per cent by 2037. If applied today, that would mean £725 of extra funding would be needed each year from every household in the country.

If that cost isn’t met, it could mean the safety net for tomorrow’s pensioners is smaller and more threadbare than that which protects today’s pensioners. That’s why the faster rise in the state pension age announced today – which mitigates some, but not all, of that extra cost – is necessary.

The support we give to retired people should not, of course, be worked out simply on the basis of an actuary’s spreadsheet. We need to be sure that all workers can cope with these changes, including those who have spent more of their life in work than others, and those in more physically demanding jobs whereby working to 68 is not practicable.

That’s why the government’s accompanying work on “Fuller Working Lives” must amount to more than lip service. The government has said it will monitor the results of these efforts to encourage employers to better accommodate older workers, including allowing them to move from more to less physical work. Delivering on these efforts will be vital to reducing the negative consequences of faster state pension age rises.

Read more: The pension pitfalls of the gig economy

Notwithstanding those challenges, a later state retirement age does not have to be the cause for despair. It’s usual in any discussion of ageing populations for participants to insist what a triumph it is that we are all living much longer. That it is oft repeated doesn’t make it any less true.

Better medicine, healthier diets and improved opportunities for women have all contributed to the rising age profile of developed societies such as the UK. Longer living doesn’t simply mean extra years lived in infirmity in very old age, it also means tomorrow’s middle aged will be healthier and more able and willing to work than their counterparts in the past.

It’s understandable for us to base our expectations of life in retirement on the experiences of the older people we know, particularly our parents and grandparents, but this is likely to give an overly pessimistic impression.

Being 68 years old in 2037 is not the same as being 68 in 1948, when the modern state pension was introduced. By the government’s own figures, someone entering retirement back then could expect to live 23 per cent of their adult life in retirement. By 2007 this had risen to 32 per cent and for many will be far higher and much of that time will be lived in good physical health.

It is welcome that, in implementing these changes, the Government appears to have learned from previous instances of state pension age rises. By telling everyone now about this change, we have a clear pathway as to when future generations should expect to retire. This contrasts with previous, poorly communicated changes that have left, for example, women affected by the equalisation of state pension age for men and women aggrieved and disappointed.

Other issues concerning the state pension remain unresolved, however, and establishing a sustainable system for increasing the payment must be addressed sooner or later. The current political uncertainty makes that difficult.

But if the government wants inspiration for how to deliver on important long-term pension policy it should look to the success of auto-enrolment, which from next year will see employee pension contribution levels increase to the equivalent of 8 per cent of salary. More might be needed, but even at those levels workers will see meaningful extra income in retirement.

Read more: Is there a case for regulatory greater control over drawdown pensions?

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