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John Lawson: Raise state pension age or expect spending cuts

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In March, the former director general of the Confederation of British Industry John Cridland was appointed to review the state pension age. His report must be published by May next year.

The review does not cover the rise in state pension age to 66, which completes in October 2020, or the rise to age 67, which completes in March 2028. Both these changes are already baked into legislation.

The terms of reference are clear the review should be “evidence based”. So what does the evidence say?

Office for National Statistics data shows men’s average UK life expectancy at age 65 increased from 15.98 years to 18.38 years between 2000/2002 and 2010/2012. Women’s average life expectancy at age 65 increased from 19.07 to 20.9 years over the same period.

If this particular period is a good predictor of the future, men’s life expectancy at retirement is increasing by 2.4 years every 10 years and women’s by 1.83 years. That would imply that, by 2022, average life expectancy at age 65 for men will be 85.78 years and for women 87.73 years. By 2032, the figures will be 88.18 years and 89.56 years. So, during the period 2010-12 to 2030-32, men’s average life expectancy will have increased by 4.8 years and women’s by 3.66 years.

Over the same period, the state pension age will have increased by only two years. That might sound like a small difference but state pension age not keeping pace with life expectancy means men retiring between 2012 and 2032 will receive their state pensions for 2.4 years longer than those who retired before 2012.

The picture for women is more complex with the current (post-2012) and next generation (2032) of women state pensioners having a state pension age somewhere between one month and seven years more than the pre-2012 generation. The current Women Against State Pension Inequality campaign highlights how aggrieved some in these age groups feel about this change.

Even if the age differential is small, the cost most certainly is not. Assuming an average of 400,000 men reach state pension age each year between 2012 and 2032, those extra 2.4 years will cost taxpayers £155bn in state pension payments (assuming receipt of the full new state pension).

Although the actual cost will be smaller, it will still be significant. If the average state pension is £6,500 a year, rather than £8,094, those extra 2.4 years still come at a cost of £125bn.

Current life expectancy trends are already suggesting state pension age in 2032 should be 70 rather than 67. That means those changes currently legislated for are already well behind the curve.

There are two possible solutions: accelerate the change to age 67 so that it happens before 2028 and introduce further changes to increase the state pension before 2032, or the extra cost can be accepted and spending on other areas such as health, education and defence will be less.

Whatever the solution, there will be some who are unhappy with the outcome. Telling people they have to retire later is never an easy political message but it is one that may have to be considered.

John Lawson is head of financial research at Aviva

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