State pension age controversy is on the horizon in the UK, says Tom Selby, head of retirement policy at AJ Bell
A review into the state pension age is set to be published in the coming months. The review is expected to determine when future retirees can expect to receive their state pension in the UK.
Recent data suggests life expectancy improvements have stalled, which some will argue means state pension age increases should be scaled back – or even cancelled altogether.
But those downward shifts in life expectancy projections, in part a result of the pandemic, come after decades of rapidly rising longevity. During that period, the state pension age of women has risen by six years – mostly to make it equal with the men’s state pension age – while for men it has risen by just one year.
In reality, younger savers need to prepare for a world where the state provides less of their retirement income than it has done historically. Indeed, it would not be surprising if those in their 20s and 30s today have to wait until their 70th birthday or even beyond to receive the state pension.
How high could the state pension age go?
Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt, risk being caught between the Devil and the deep blue sea when it comes to state pension age increases. A dramatic acceleration of existing plans would risk electoral oblivion, while pushing back planned rises could cost the Exchequer tens of billions of pounds.
The fact we don’t know exactly how long the Government intends for people to be in receipt of the state pension makes it difficult to predict the outcome of the review.
Maintaining the current proportion of the population living up to and beyond state pension age would require an increase in the state pension age to 68 by 2034, 69 by 2038 and 70 by 2042, according to the International Longevity Centre, a highly respected think-tank.
On-the-other-hand, ensuring one third of adult life is spent in receipt of the state pension would push back the planned increase to age 67 to 2040 – but cost the Treasury billions of pounds.
Given these challenges, the easiest move both politically and fiscally may be to stick to the existing timetable. The decline in life expectancy projections means this could boost the Treasury’s coffers while potentially avoiding a fatal electoral fallout.
What has been happening to life expectancy?
For decades, average life expectancy across the UK had been growing at a rapid rate. At the beginning of the 1980s, average life expectancy at birth was around 71 for men and 77 for women.
By 2017-19, average life expectancy had reached a record high of 79 for men and 83 for women. However, between 2018-20 average life expectancy for men dipped marginally, in part as a result of the pandemic.
Expectations of future life expectancy increases have also plummeted. For example, back in 2014 the ONS thought that by 2028 – when the state pension age will rise to 67 – the average life expectancy for a 67-year-old man would be 21.1 years, while for a woman it was expected to be 23.1 years.
However, the latest projections suggest that by 2028 the average life expectancy of a 67-year-old man will be 18.7 years, while for a 67-year-old woman it will be 20.8 years.
Source: AJ Bell analysis of ONS data – Expectation of life, principal projection, UK – Office for National Statistics (ons.gov.uk)
The great life expectancy divide
The state pension age review will not just look at averages – it will also consider life expectancy trends ‘in every part of the UK’.
One of the major challenges when designing state pension policy is balancing simplicity with fairness. The flat-rate state pension introduced in 2016 aims to simplify the benefit people receive over the long-term, while the state pension age remains universal.
As such, the Government has very much gone for simplicity over fairness, with the aim of creating a state pension system which savers can understand and use as a foundation for their retirement plans.
The downside of this approach is it does not take account of the yawning differences in life expectancy that exist in the UK.
For example, official data suggests men living in the most deprived areas of the country live almost 10 years fewer than men living in the least deprived areas. For women, the difference is almost eight years – and both sexes have experienced ‘significant increases’ in the inequality of life expectancy at birth since 2015-17.
The gaps in healthy life expectancy are even more staggering, standing at around 19 years for both men and women.
There are ways this could be addressed, but each comes with significant challenges.
Means-testing could make the system fairer but would add unwelcome complexity, not to mention administrative cost.
Allowing earlier access to the state pension, potentially at a reduced rate, would at least allow those who may have limited life expectancy to access some of their state benefit sooner.
However, one of the dangers here would be that people might end up short on cash, particularly in their later years if any private pensions run out and they’re left with only that lower state pension income. From the Treasury’s perspective it could also present short-term cashflow challenges.
Another idea that has been floated would see people entitled to access the full state pension after reaching a certain number of years’ National Insurance contributions. The thinking here is that those who are more likely to start work when they are young are, on balance, more likely to have manual jobs they may struggle to continue with when they are older.
Some of these ideas have merit, but none are perfect and each would make messaging around the state pension more complicated. They also entail a major overhaul of the state pension system, which would inevitably be controversial.
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