Opinion: the State Pension must evolve to survive

If the State Pension doesn’t change, I worry that it will disappear.

I am growing increasingly concerned that the State Pension will have vanished by the time I reach retirement.

Life expectancy has risen dramatically over the last few decades, resulting in the pension age being pushed steadily back. While my mother gained her State Pension at 60 – and a work-place pension even earlier – I am told to expect mine at 68.

That’s a pretty dramatic increase.

And even more worryingly, there’s a note on the ‘Check your State Pension age’ tool that warns “The State Pension age is under review and may change in the future”.

Hardly reassuring when it comes to my financial planning.

How much the State Pension will pay in 2019/20

Changing times

A report by the Government Actuary’s Department has suggested that the pension age will need to rise by about a year every decade.

That means there’s a good chance that people currently in their 20s will end up working until they are 71 before they can claim their state pension.

And a recent survey carried out by Prudential showed that more than half of over-55s fear the State Pension will be abolished entirely.

That may concern the over-55s but it should be worrying younger people even more. Four years ago the Centre for Policy Studies warned that State Pension funding is running out and urged people in their 20s and 30s to plan for a retirement without an income from the state.

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What’s more, in January the Government Actuary’s Department, which collects national insurance contributions and uses them to pay state benefits, warned that the State Pension fund could hit zero by 2035.

Let’s be frank; if millennials end up paying higher taxes to fund pensions that will be scrapped by the time they reach pensionable age then the system is broken, rigged and deeply, deeply flawed.

So there’s a lot wrong with the State Pension’s finances and I am concerned these reasons will be used to scrap it entirely. That would be a disaster for old-age poverty.

Instead, we need to have a real conversation about how the State Pension might need to change to better serve our ageing population.

I don’t have the answers but there are some important questions we need to address. Here are just a few of them.

Please don’t mistake this for an anti-State Pension piece. I want a State Pension that everyone can rely on in their old age.

But for that to happen, the State Pension needs to survive and to do so I believe it needs to evolve to address some of the current unfairness.

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We need to talk about equality of labour

I may frown at the idea that I will be working until at least 69, but let’s be frank – my job is physically easy. I work at a computer, in a warm office or coffee shop, and occasionally I lift a phone.

So, while far from ideal, it is certainly likely that I can keep doing so until I am nearly 70.

But what about the bricklayer or farmer or nurse whose daily work involves lifting, carrying and back-breaking labour?

There is currently no safety net that allows such workers to claim a pension once their work becomes untenable.

What’s more, there is currently no recognition that the challenging physical nature of their work may actually contribute to them becoming less able sooner, due to back problems or injury.

That’s just not fair.

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We need to talk about equality of life-span

Another concern is life span. Figures from the Office for National Statistics show that the gap in life expectancy between rich and poor is widening and the gap for healthy life expectancy is even wider.

Average life span even differs across different regions or, in areas such as Glasgow, there are dramatic differences even between streets.

So the poorest benefit less from the State Pension than the richest because they are less likely to live as long.

Ian Browne, pension specialist at Old Mutual Wealth, says: “The harsh reality of life expectancy means the one size fits all approach to the State Pension results in those who are the wealthiest, who have paid the most in national insurance contributions and who live the longest, are the ones who benefit the most.

“This goes against the principle that the State Pension was built upon: to help people in poverty in later life. The benefit has been expanded over the decades to include more and more people and provide better and better benefit levels.

“This is no bad thing, but we now have a situation where a person who has paid enough in NICs to receive the full state pension, and is from a wealthier background so can expect to live for about 21 more years, will receive over £174,000 from the state.

“This means the state pension has two problems: it’s inherently unfair and it’s unsustainably expensive.”

I agree; the current system is terribly unfair.

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We need to talk about the cost

The UK Government has almost £5 trillion-worth of pension liabilities that it will pay out in the future. £1.2 trillion is for public service pensions but £3.84 trillion relates to the State Pension.

Of course, most people believe that they pay for their State Pension via their National Insurance contributions, but that fact is that few of us pay in NI what it would cost to buy an annuity that size.

According to the Intergenerational Foundation, the bill for those pensions is largely being paid out of annual tax revenues, meaning today’s Government is not setting funds aside to cover them. That’s a heck of a bill to hand on to our children.

The foundation also asked 50 economists whether the situation was tenable. Worryingly, 75% said they did not believe the public sector pension liabilities would be paid in full and almost 50% said the State Pension would become means-tested before 2040.

I would never suggest that people don’t deserve old-age support. But we need to have a real conversation about how we can fund that and how fair it is to keep kicking the rising cost down the road.

Making our children foot massive pension bills is unfair - especially if they may not benefit themselves.

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We need to talk

Look, I don’t have the answers. I don’t even have some of the answers – this is a massively complex area and there are many people far more qualified than me who could talk about the ethics and economics of it, as well as any potential technological solutions.

Means-testing the State Pension would be far too blunt a tool. If previous means-testing examples are anything to go by then it’s all too often used to cut the overall cost rather than direct more money to the neediest.

But right now our State Pension is filled with inequalities and it’s worryingly unsustainable. If the millennial generation both funds the boomers’ pensions and loses their own then that would be a real and outrageous wrong committed against them by short-sighted politicians.

Something has to be done – and that begins with a genuine conversation about what the State Pension should look like and how it can best serve everyone equally.

And if that means that I work longer at a warm desk than someone who’s spent years carrying out hard physical labour then at least that will be fairer.

What do you think? Is the State Pension fit for purpose? How could it change and should it? Vote in our poll and then elaborate on your view using the comments below.