Work and Pensions Secretary David Gauke’s announcement the state pension age will rise to 68 seven years earlier than planned would save a lot of money. Or would it?
Documents issued at the same time show that bringing forward the rise would save £74bn over the nine years from 2037/38 to 2045/46, with the total cost cut from £2.003trn to £1.929trn.
That’s a 3.7 per cent reduction which would save 0.4 per cent of the UK’s annual income (GDP).
So not much more than a rounding error and certainly within the uncertainties of forecasting. But it all plays into the “we can’t afford it” scenario some suspect is part of a long-term campaign to means-test the state pension at some point in the future.
Packing up early
Today’s 65-year-olds can expect a 24 year paid holiday at the end of their lives, with a one in four chance of it being 31 years (for men, subtract a couple of years from each).
Why should the state pay for that, the argument goes? Especially when the people paying for it are young workers, half of whom will suffer a 9 per cent graduate tax and many of whom are trying to save up a year’s pay to put down a deposit to buy a place of their own.
The state pension is an important component of how we pay for that holiday. Now worth around £160 a week – £8,300 a year – it is the bedrock of retirement savings. It is not much to live on (though more than a million single pensioners have nothing more) but it is very valuable.
To buy an index-linked pension of £8,300 a year for a single, healthy non-smoker at 65 would currently cost more than £250,000. So saving enough even to match the state pension will be very costly.
Hargreaves Lansdown head of pension research Tom McPhail estimated for me that you would need to save in the region of £300 a month for 40 years to do so. That is about double the contributions going into a standard auto-enrolment pension for someone on average pay.
And at the end of it, their total income – state and private – would only be the equivalent of the national living wage for a 42-hour week.
Notching up the numbers
Can we afford to give all workers a pension that is the equivalent to saving £300 a month for 40 years? Pensioners, of course, say they are paying for it through their National Insurance contributions and, although they are not saved up, they do reach £300 a month once salary hits £38,000.
The European Union collates the data on pension spending. On that measure, in 2020, the UK will spend 7.4 per cent of its GDP on state pensions. That puts us 25th out of 28 members; well below the average 11.2 per cent of their GDP.
Can we afford to give all workers a pension that is the equivalent to saving £300 a month for 40 years?
The Organisation for Economic Co-operation and Development works out different numbers with even worse results. For someone on an average wage, our state pension replaces just 21.6 per cent of their earnings putting us 34th out of 34 countries.
France, in the middle of the table, has compulsory pensions that replace 56.8 per cent of earnings for someone on average pay. It will spend 14.6 per cent of GDP on them, double what the UK spends. Internationally, we are misers not spendthrifts.
Things look a bit better for the UK in another OECD table which counts all pensions, including occupational and personal ones too. Then we come 22nd out of 34 for those lucky enough to have a pension through their job.
Auto-enrolment is now extending pensions at work to millions more. It counts as a compulsory pension so that will push us a few rungs up the first OECD table but not many.
OECD head of social policy Monika Queisser has done the sums. She says: “We’ve looked at what would happen if the UK had the auto-enrolment scheme as a mandatory scheme, and then indeed the UK would move up to 22nd or 23rd”.
Still in the bottom third.
The fixed pension age lottery
Associate of the right-leaning think tank Centre for Policy Studies Michael Johnson is unimpressed by these international comparisons. He believes we cannot afford the state pension. GDP estimates, he says, are uncertain and countries that spend more than the UK may not be able to do so for long.
He also believes a fixed pension age is an unfair lottery. Some would draw a pension for ten years, others for 30, but all pay the same NICs.
These views are part of an upcoming BBC Radio 4 programme (Can we Afford the State Pension? 5 August 2017, midday) about the future of the state pension.
I asked my three guests whether there would be a state pension in, say, 50 years?
Monika Queisser: “Financially it must be sustainable because it is not a very high pension”.
Michael Johnson: “I would scrap it from 2020”.
Sir Steve Webb, Royal London director of policy and ex-Pensions Minister, who introduced the new state pension: “Categorically yes”.
Webb has welcomed the announcement of bringing forward the rise in state pension age. But it may not happen. The Government is not planning to change the law which sets 2046 for the age to rise to 68.
At the end of his statement, Gauke told MPs: “We will carry out a further review before legislating to bring forward the rise in state pension age to 68”.
In truth, his minority Government probably could not get such a controversial move through the House of Commons. So he will leave any modification to be made by the government in power at the next state pension review in 2023.
By then, we will have new data on life expectancy and we can decide if it is worth cutting spending by just 0.4 per cent of GDP. Or if, instead, we should try to push our way up the international comparisons and make the state pension more than half the minimum wage so the millions who rely on it can live more comfortably.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney