Pensions have not featured massively in this year’s election debates, although on other occasions, for older people at least, this has usually been an issue that has materially influenced voting intentions. This is especially so when it comes to the level and sustainability of the state pension.
This year’s election has seen politicians of all parties supporting the continuance of the triple lock on the state pension, at least for the duration of the new parliament, without, as far as I can see, explicitly committing themselves to anything beyond that. Not rocking the boat and retaining the pensioner vote is clearly important in the quest for electoral success.
And yet there are many people who think the days of the state pension are numbered and, with or without the triple lock, will not be affordable in the long term. The younger generation in particular seems very sceptical that, when they reach their state pension age many years in the future, there will indeed still be one. Many believe they will have to fend for themselves as best they can.
So are they right? What is the future of the state pension and is there likely to be a funding problem for it in the face of increasing longevity and the inevitable extra demands of an ageing society?
I do not think the majority of the country at large has quite cottoned on to the fact the new single tier state pension coming into force from next year will actually save the government money, not cost it more, over the medium to longer term. Fed on a diet of political spin of a new “more generous flat rate pension” it would be surprising if that were not to be the case.
The new pension will not be more generous for everyone – the main beneficiaries will only be those on low earnings and others including the self-employed who have not been able to build up additional pension from SERPs and S2P – nor will it be flat rate. In fact, because of deductions that have to be made for earlier periods of contracting-out and the increased national insurance qualifying period of 35 years, only about 45 per cent of recipients in the first year (2016/17) will actually receive the full rate. Even by the time we reach 2030 there could still be as many as one in five that fall short of the full amount.
Add on to that the savings the Government will make in not having to pay out further NI rebates from next year and the fact many of today’s younger workers will be worse off when they eventually reach their extended state pension age with a single-tier pension in comparison with what they would have got from a combination of the basic state pension and S2P. You can then see how the Government actually stands to gain from the new regime and is unlikely to have to find extra funding to support it.
Against that there is the risk of pensioners living to even greater old ages and state pensions having to be paid for longer and at extra cost. But that can be partially offset at least by further pushing back of the state pension age for new retirees to 70 or beyond.
There is, of course, the further option – perhaps the nuclear option – of means-testing the state pension. However, given what people see as the perceived link with NI contributions, this would not be popular – to put it mildly.
That said, in any event, if the freedom and choice agenda continues to hold good for the decumulation stage of private pension saving the Government will probably have a vested interest in ensuring as many people as possible have some sort of alternative underpinning regular income in retirement and would wish to continue a state pension to provide that stable income.
So, then, what does the future hold for the state pension? I believe there are good reasons for keeping it and hopefully ways will be found to keep it affordable and non means-tested. The workers of today may have to wait longer for it and it may not be as valuable as it is now but while we continue to live in a democracy the electorate will surely hold our politicians to account and not allow it to disappear completely.
On that basis, the state pension should endure in both the short and longer term. In the interests of future generations of pensioners I hope I am right.
Malcolm McLean is senior consultant at Barnett Waddingham