Like most developed countries across the world, the UK’s population is tipping rapidly into old age. By 2042, 24 per cent of people living in the UK will be aged 65 or older, up from 18 per cent in 2016. The all important ratio between working people and pensioners is shifting, and as a result, the weight of the financial burden is growing.
Earlier this week, centre-right think tank The Centre for Social Justice (CSJ), chaired by former secretary of state for work and pensions and Conservative party MP Iain Duncan Smith, recommended raising the retirement age more rapidly than is currently planned – up to 75 in the next 15 years. At present, the retirement age is on course to reach 67 by 2028, and 68 between 2044 and 2046 (although in 2017 the government announced plans to accelerate it to 68 between 2037 and 2039). By contrast, the CSJ report advocates increasing the age for receiving state pension to 70 by 2028 and 75 by 2035. But is simply pushing the retirement age up indefinitely the best answer to an ageing population?
“If life expectancy continues to improve, then we should expect it to continually increase,” says David Blake, director of the Pensions Institute, a research centre. To preserve intergenerational fairness, this proportion should shift as life expectancy goes up, he argues. But while seemingly intuitive, the idea of continually nudging up the retirement age poses a number of issues – chief among them that life expectancy in the UK has stalled since 2011. As of 2018, it was only increasing by 1.2 weeks per year, making any expected gains over the next ten to 15 years negligible if this trend persists.
It’s government policy that each person should work for roughly two thirds of their adult lives, and enjoy retirement for up to one third. Given that the current average UK life expectancy is 80.96 years, postponing the retirement age to 75 would mean the average UK citizen experiencing a mere six years of retirement before death. This is a radical curtailment from the current amount of time enjoyed, which is the best part of 15 years.
More pressingly, in some of the UK’s most impoverished areas, the average life expectancy skims 75. In Liverpool, for example, the male life expectancy is 76.1, meaning that people in the city would be working up to the grave despite making National Insurance and income tax contributions their whole working lives.
Because of this, some have critiqued the lack of nuance provided by a universally applied retirement age. For example, British life peer and UK pensions expert, Ros Altmann, has called for basing the age of retirement on a collection of factors such as health status, unpaid work such as caring, and the length of contributions to national insurance. This would translate into an adaptable, “means-tested” retirement age rather than the standard age cut-off in effect now.
CSJ has been influential on the policies of the Conservative party before, for instance providing the groundwork for its controversial Universal Credit policy. However, in this case, work and pensions secretary Amber Rudd has released a statement saying that the government is not considering the proposal. Part of the reason might be that the issue is a political landmine.
“Increasing to 75 right now would be quite a leap, and it would be hard to implement politically,” says Blake, pointing out that the recent abrupt increase in the retirement age of women born in the 50s, from 60 to 66, was met with outrage. In many cases, women affected only discovered that the age had been pushed back by six years when they went to claim their pension, scuppering their financial plans for later life. Surveys carried out on those affected found that reports of attempted suicide and self-harm were common. A campaign, BackTo60 was launched as a result.
Many dispute that raising the retirement age is the best response to an ageing population. “It’s fundamentally saying: ‘We’ve got a problem with the economy, but we need to fix the way that society behaves, the way that we live our lives, and ultimately affect the quality of our lives’,” says Alfie Stirling, head of economics at the New Economics Foundation, a progressive think tank. “Are people there to work for an economy? Or should the economy be there to work for people?”
At a basic level, an ageing population creates a fiscal problem, as the government needs to pay more in pensions and old age benefits. This inevitably brings us to the issue of taxes: the UK’s rates are lower than most western European countries’ – and while that tends to sound appealing to workers, it has unexpected consequences. People pay a smaller proportion of tax on their income, but public funds, including welfare and pensions, are starved of cash relative to countries with higher taxes. “There’s a contradiction there, which is, if you hadn’t made the tax cuts in the first place, people wouldn’t have to be working longer,” Stirling points out. He advocates economy-based rather than people-based solutions, such as a more progressive taxation model that taxes capital at the same rates as labour.
Stepping back, it’s necessary to examine how pensions fit into the overall social welfare machine. The UK provides the lowest state pension in the developed world, accounting for a mere 16 per cent of the income made during work. The UK also varies in the proportion of public transfers (state pension and benefits) that make up the average source of income for older people. In the UK, this is about 40 per cent, whereas in Spain, France, and Germany this is around 70-75 per cent. Instead, occupational pensions make up a larger proportion of income for older person, at around 30 per cent.
An average UK pensioner’s income is worth 29 per cent of their earnings at retirement. Among the developed countries making up the OECD, the average is 63 per cent, while the average for EU member states is 71 per cent. In the Netherlands, Turkey and Croatia, pensioners receive more than 100 per cent of their salary in retirement.
There are two political science models that form the basis of pension systems: Beveridgean and Bismarckian. Bismarckian models are adopted in countries that generally have high taxes, and more supportive welfare state systems. In these countries, there is not much private sector provision contained in pensions. The Beveridgean model, meanwhile, is what has shaped the UK’s relationship to the welfare state. This model dictates that the state should provide a minimum level of support to prevent people falling into poverty. “But you are expected to make private sector provision if you don’t want to have a minimal standard of living in retirement,” explains Blake. This, he says, is the primary difference between the two models.
Both systems have issues: Bismarckian setups are heavily reliant on state spending. Some of the most successful pension systems in the world are a mixture of the two. The Melbourne Mercer Global Pension Index 2018 ranks the pensions systems in the Netherlands, Denmark and Finland – countries with some of the highest taxes and mixed pension models – as the best in the world. The UK’s, however, ranks far below, and was given a global grade of C+.
Important indices reflect the inadequacy of the system. In the UK, people over 65 suffer the worst poverty rates in Western Europe. What’s more, this rate is five times what it was in 1986. This is down to a meagre state pension and means-tested supplements, according to the report Pension Reforms and Old Age Inequalities in Europe, published this month by academics at the University of Oxford. “The United Kingdom is a good example of the Beveridge-lite systems that have historically failed to combat old-age poverty,” professor Bernhard Ebbinghaus, the report’s lead author, told The Guardian. The lowest poverty rates among the elderly are found in the Netherlands, where there are generous basic pensions and the Nordic welfare states.
But why has poverty among the elderly increased fivefold since the 1980s? The research found that, overall, those European countries that had made private pensions an important source of income for the elderly had seen a rise in financial inequality. “The comparison shows that the shift toward increasing privatisation amplifies the already existing level of social inequality,” Ebbinghaus said.
Instigated under Margaret Thatcher, who over her 11 years in Number 10 implemented a drastic privatisation agenda, UK public services have been further chiselled away by the austerity policies of recent years, which have gouged £40 billion a year from the work and pensions budget through cuts and freezes to tax credits and benefits. A 2019 UN report noted the “systematic immiseration [economic impoverishment]” of a significant part of the UK population, which explains the fifth of the UK population (14 million people) who live in poverty, with another four milliontrapped in deep poverty (defined as having an income at least 50 per cent below the official breadline).
Blake says that in the Netherlands, people willingly contribute 20 per cent of their pay to their pension funds, a sum “that to 25-year-olds in the UK would be unthinkable”. That feeling is understandable when one takes into account that real wages in the UK are lower than they were ten years ago, and are increasing slower than all of the G20 countries. Indeed, as Blake notes: “The highest growth in employment in Britain is amongst over 65s, who are having to stay in work as they can’t afford to retire.”
Despite all this, working until later in life isn’t necessarily an uncontested evil. Instead, the problem may hinge on the expectation that we’ll work long and intense schedules right up until retirement. “That can lead to all sorts of problems during working life in terms of well-being, and it can also create this cliff edge, where people experience a lack of identity or a lack of purpose once they’ve retired,” says Stirling.
Alternative solutions include tapering off working life more slowly, with incremental steps down in the number of working hours or responsibilities, along with greater flexibility and less punishing work schedules during our working lives. To solve the issue of pensions for an ageing population, it’s clear that simply raising the retirement age masks deep fractures in the UK’s economic model. It’s a whole dysfunctional ecosystem, of which pension provision is only one part.
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