The baby boomers are about to become retirement boomers. The people born in the few years just after the Second World War are now reaching their state retirement age. The baby boom was not just for a few years after the war either, it went on for well over a decade, so we are going to get plenty of new retirees hitting the country’s balance sheet for years yet.
Given what else has been going down on the national finances front lately, that is something that is probably not too helpful. The timing could not be worse. Right now, we have got about 12 million people over state pension age. By this time next year, we will have added almost another million to that number, an unprecedented leap and that is just the start.
Politicians are getting a bit worried by all this, so we can expect more changes on the pension front as we get deeper into the mire. But why are we so surprised that we now have so many 65-year-olds? That is not the problem. The problem is that 64 years ago we had too many one-year-olds. This is not something that has happened overnight. We have known how many 65-year-olds were going to be hitting retirement in 2011 for over six decades but have not done anything.
The boomers who are about to claim their state pensions have paid towards them through National Insurance for the last four decades or so.
All that money came in and went out. It should not surprise us that one day the millions who contribute every week and month towards NI would reach the point where they would start to claim their accrued entitlements.
The political response is likely to be a rise in the state retirement age. It has already gone up from 65 to 68 for some men and women and from 60 to 68 for many women. There is talk of a further rise to 70 or higher or bringing forward the increases that are already planned. Or maybe even both?
Can you imagine a company pension scheme being run on a similar basis? Fortunately, companies that promise their employees pension benefits are not allowed to put off paying for them for decades and decades. Company pension schemes have to be properly funded so employees can be sure the pension benefits they are anticipating will be there for them, whatever the company’s finances at the time they retire.
It is about time our state pension promises were properly funded too. One way of doing that would be to extend the principle of contracting out to include the basic state pension. Sadly, that is not what is happening these days. The opposite is happening as millions of people with defined-contribution schemes are losing the right to contract out of the state second pension. If ever we could do with a U-turn on pension policy…
Steve Bee is managing pensions partner at Paradigm Pensions