With the government having announced an increase to State Pension Age (SPA) to 69, several things spring to mind.
Less than four years ago, SPA for women was 60. It was meant to equalise to the male SPA of 65 in gradual steps between 2010 and 2020, which were steepened for equalisation to be achieved earlier, by 2018, instead.
Several announcements have seen the SPA rise further to 66, then 67 and today, we see the stage to reach 68 also brought forward, and 69 being the SPA for those who are in their 30s or younger. Some women are already facing having to wait nine more years – probably longer given likely future changes to SPA – than their older counterparts before they will receive a state pension.
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Brits are on average living longer and the current system as a whole is not sustainable given our existing demographics. We have an ageing population meaning in the future we expect to have fewer people of working age and more people in retirement, than we do now. As today’s National Insurance Contributions (NIC) are used to pay today’s state pension, with more people in retirement and fewer people paying NIC, something has to give – rise in SPA, reduction in pension amount, increase in the NIC rate.
However linking SPA simply to increases in life expectancy is unimaginative and not a long-term solution – unless we are prepared to see SPA reach maybe even 75 for today’s teenagers, given expected future improvements in longevity. Indeed, life expectancy is also not the same as healthy life expectancy – which would be a better link for the SPA. Just because people are living longer, doesn’t mean they can work in their jobs for longer. There are also significant differences in life expectancy between people of different backgrounds.
Manual workers and those on lower incomes tend to die earlier and therefore receive the state pension for fewer years than someone more well off, who has contributed for the same length of time. These groups are more severely penalised from increases to SPA which will see some never receive a penny in return for their NIC. They’re also more likely to be the ones who begin working – and hence paying – NIC from a younger age.
Some people need their state pension to survive – delaying payment of this means they are unable to leave the workforce. It is also common for employer-sponsored pension schemes to use the SPA as a reference for some of their benefits or even the scheme retirement age – so older people may choose not to leave the workforce even where they could afford to do so.
If unemployment for younger people rises because of a lack of positions being vacated by those who could be pensioners, number of people on unemployment benefits will probably increase.
We must consider integration with other state benefits as well – NHS prescriptions, Pension Credit, Winter Fuel Payment, Income Support, bus passes even! Are we simply looking to save money by any means possible, or will certain benefits need to be de-linked from the SPA?
There are other avenues which could be explored to address the longevity concern, such as increasing immigration of people of working age, encouraging people to have more children, or more radical routes, such as a two-tiered means-test SPA where those who really need the state pension – which will likely overlap with those with lower life expectancies – receive it at a younger age (say 65), and everyone else later (say 69).
Increases to SPA have coincided with radical changes to the state pension system, with the replacement of SERPS (State Earnings-Related Pension Scheme) with S2P (State Second Pension) in 2002, and that now also being abolished in place of a single tier pension. There have been several other changes: number of years NIC required for a full single tier pension, elements which count towards NI credits, allowance for dependants and a floor on qualifying years of between 7 and 10 for entitlement to a state pension.
International students and migrants who tend to be here only for a few years will therefore pay NIC but won’t receive anything in return – this should help ease the burden on our state pension.
However, constant and significant changes, and delays in seeing a return on NIC, run the risk of disenchanting the population, with confidence being lost rather than encouraging planning for retirement.
Whatever changes the government makes, there needs be a clear commitment to stability in terms of the state pension system as a whole.
Sonel Mehta, Head of Actuarial Resourcing at Hazell Carr
