The following is an excerpt of an article by Economics editor Oliver Stanley. This features in our fifth print issue, available from the 15th September.
Find out how to get your own copy of the issue here.
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As it is prone to doing, the Twittersphere has recently entered a meltdown due to its belief that the Conservative government is planning to raise the state pension age to seventy-five. Naturally, the meltdown is predicated on a falsehood – the government (currently) has no such plan. In fact, the idea came from a think tank report suggesting it as a policy.
That national left-wing media outlets are evidently permitted to describe think tank recommendations as official government policy is amusing to me. But a discussion of the underlying idea is worth having.
A state pension age of sixty-five (for men – sixty for women) was introduced in 1925. Life expectancy for men was then below sixty, and for women only just over sixty. The state pension age has since risen to sixty-eight (equal for men and women). Life expectancy is now over eighty.
Why does this all matter? Well, it means state pensions will be claimed by more people and for a longer time by each person. In the UK, we have a pay-as-you-go (PAYG) pensions system, meaning pension payments for the currently retired are funded by taxation on current workers.
With the UK’s ageing population, there is in effect a situation in which current workers must pay an increasing amount of tax per-capita to fund the same level of state pension. Given life expectancy should continue to increase and the ageing population problem is not going to disappear overnight, the problem will likely only expand in the coming decades. If no action is taken, the UK pensions system is simply not sustainable.
Research by economists Meier and Werding in 2010 found the UK would need to spend an additional 3 per cent of GDP per annum on funding pensions by 2050 (vs 2000) to maintain the current pensions system. This is a very significant amount of money – over four times the foreign aid budget, for instance. So, it is clear that a policy response of some form is necessary to alleviate the problem. What, then, are the choices?
The first would be to decrease the size of the payments to pensioners. This is probably the simplest option but may also be the worst. The current state pension works out at about £8,500 per annum, less for those who have made less than thirty-five years of national insurance contributions. Reducing this much further would be likely to place many of the worst-off pensioners in poverty. For some, this state pension is the only source of income in retirement.
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Read the rest of this article in the print issue, information on which can be found HERE.
Photo by Vinoth Chandar on Flickr.