Why we need an urgent debate about the state pension

The retirement age will need to rise to 71 for UK workers in future, according to a recent report looking at the effect of increasing life expectancy and falling birthrates on the state pension.

The current pension age of 66 is set to rise to 67 by 2028, and to 68 from 2044. But research by the International Longevity Centre (ILC), a think tank focusing on ageing, says that doesn’t go far enough.

It suggests that anyone born after April 1970 may have to work until they are 71 years old in future. And there’s a possibility that the age limit may need to go even higher than that. The underpinning reason is the rising cost of pension provision because the number of pensioners and the value of payments are growing.

The government’s Office for Budget Responsibility estimates the state pension will cost around £124 billion this financial year. The pension level is safeguarded by the triple lock, which was first introduced in 2010. It means annual increases in payments are made in line with earnings growth, price inflation (currently 4%) or 2.5%, whichever is highest.

The Institute for Fiscal Studies has estimated that continuing the triple lock will lead to an extra £45 billion of annual cost by 2050.

It’s not just the UK

The issue of rising pension costs isn’t merely a UK problem. Countries across Europe are currently grappling with the conundrum of how to look after their ageing populations in retirement.

Protests erupted across France in 2023 in response to pension reforms which would increase the retirement age from 62 to 64. There have also been ongoing protests in Greece, which has been struggling with pension reforms since 2010.

Pension age increases are also planned in numerous other countries such as Denmark, the Czech Republic, Spain and the Netherlands.

How the state pension works

Unlike company-sponsored pensions, which invest money in individual accounts for future payouts, the UK state pension operates on a different principle. Instead of accumulating a personal “pot” of money, the idea is that current workers essentially fund the pensions of retirees. So, the state pension is financed from national insurance contributions and general taxation.

For this model to sustain itself, each new retiree entering the “pensioner pool” needs to be matched by a new worker entering the “worker pool”. As long as this balance persists, and pension claim periods remain reasonable, the system maintains its solvency.

Less than five years after the introduction of the state pension in 1946, the pressures on the system were already beginning to show. And the central issues are the same now as they were then – we are living longer and having fewer children.

In 1951, the UK life expectancy was 66 for men and 71 for women. By 2011, it had increased to 79 for men and almost 83 for women.

This means that a 66-year-old in 2024 will receive a pension for an average of nearly 16 years. But since birth rates have fallen from 15 per 1000 in 1951 to 10 per 1000 in 2021, those retirees aren’t being replaced with fresh workers.

In 1951, the UK population was 50 million with an employment rate of 70.4%. There were 35.2 million workers who were supporting 4.5 million pensioners, or 7.8 workers for every pensioner.

Today, the UK’s population is more than 67 million, which includes 33.17 million workers and 12.8 million pensioners. This means that every pensioner is being “supported” by just 2.6 workers.

Both central planks of the state pension system appear to be broken. And, to further complicate matters, we are seeing increasing levels of people leaving the workforce before they reach pension age, largely due to ill-health.

The state (in other words, the taxpayer) cannot afford the current pension provision for an ageing population for longer periods, let alone improve it. So, tough decisions have to be made, and soon.

Generation X and millennials

The implications of a rising retirement age won’t be felt by baby boomers like me. Generally speaking, we have benefited from jobs for life, free education, affordable housing and good company pensions.

The first cohort to shoulder the changes to the pension age will be generation X, born between 1965 and 1980. And they do not possess the wealth and assets of previous generations.

In fact, recent government figures show that a third of the UK’s 14 million gen Xers won’t have enough savings to comfortably cover their retirement. More than half are not confident about achieving a good standard of living in retirement.

This generation, sometimes described as the “forgotten generation” by finance experts, stands at a disadvantage due to their lack of early access to defined benefit pensions, which were largely closed to new employees by the time they entered the workforce. They also missed out on the financial benefits of automatic enrolment in workplace pension schemes, which was introduced only after many members of this generation had already established their careers.

The situation doesn’t look any rosier for the millennials, who have struggled to get onto the housing ladder and are paying back student loans. Research last year showed that almost a third of 18 to 34-year-olds had either stopped or cut back on pension contributions to save money.

Perhaps it comes as no surprise that more than two thirds of this age group don’t believe the state pension will even exist when they enter retirement.

While the future of the state pension in its current form remains uncertain, one thing is clear – ignoring the problem is no longer an option.

*Chris Parry is Principal Lecturer in Finance at Cardiff Metropolitan University. This article is republished from The Conversation under a Creative Commons license. Read the original article.

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