Raising the pension age by easier stages could minimise political hostility

It is widely agreed that state pension age (SPA) needs to rise to reflect the financial downside of the happy prospect of greater life expectancy. The current government is committed to this, albeit over a leisurely time horizon. George Osborne recently kicked up a bit of a storm by suggesting bringing forward the process and raising men’s SPA to 66 as early as 2016.

Part of the political difficulty of bringing this in arises from the assumption that we must change SPA by one year at a time, which leads people to complain bitterly that they could have had a year’s extra pension if they’d been born a few days earlier. But why do this? Why not advance pension age more gradually, say by three months per year for several years? The differential impact would be hardly felt by individuals. And as life expectancy at retirement is anyway rising by around two months or so per annum, it could be presented as “fair” between cohorts.

One of the attractions of this idea is that we could begin almost immediately – say 2011.

If a man was due to reach SPA on January 1st 2011, he would instead do so on April 1st. The next year, a man reaching 65 on January 1st 2012 would be pensionable on July 1st. This process would continue until whatever was deemed the appropriate long-term SPA. The process for women would take longer as the process of equalisation of SPA has yet to begin.

Doing this would bring immediate fiscal benefits. Under the current dispensation, just under 680,000 people become pensionable in 2011. If their pensions were delayed for three months, the net saving could be of the order of £700-800 million in the first year and £1.5 billion in the second year (allowing for some extra payments in income support etc for those who are not in employment on reaching current SPA).

Any takers?

The idea of starting soon and raising the State Pension Age by, say, three months per year for several years has attractions. But if we assume that the ultimate objective is a State Pension Age of 70 (and it may end up being higher), it would take twenty years to reach it — which is quite a long time.Maybe I’m incredibly wealthy, but I delayed the receipt of my own state pension by five years (from 65 to 70) in order to get a bit more each year if I lived that long; and (admittedly with an occupational pension from USS) I haven’t really noticed its absence. I wonder if I’ll notice its presence next year when I am due to reach 70?

There were some revealing results in the First report of the (Turner) Pensions Commission in 2004. Only 7 per cent of respondents said they had a fairly clear idea of how much state pension they could expect in retirement.When people were asked who they trusted to deliver on pension promises, there were four main answers possible: I trust a great deal; I tend to trust; I tend to distrust; I do not trust at all.Deducting the last two from the first two gives net ‘trust’ scores as follows:employers PLUS 40 per cent
pension providers PLUS 14 per cent
government MINUS 67 per cent!This does suggest that people will be suspicious of anything the government proposes.

Raising the pension age by small, incremental stages is an excellent idea. The same could be done with pension credits, which in their present form severely undermine work incentives for the over-60s, particularly those with chronic health conditions which prevent them from working full time. There is a danger that raising the SPA will save little if people are displaced on to a combination of pension credits and disability/incapacity benefits. Indeed, because pension credits are means tested, incentives to save for old age may be reduced still further.

I have often thought that we need to wean people off the state pension. I say wean because we can’t just scrap it; plenty of people are relying on it. To tell a 50 year old that they won’t get a state pension is unfair: they’ve worked for thirty years expecting it, and not prepared for a world without it. But I see no reason why we should not tell a 20 year old that they won’t get a state pension, as they have all the time in the world to make their own arrangements.I suggest a phasing out approach. Anybody over 60 gets a full pension; anybody under 20 gets no pension. The rest of us see our pensions tapered away at a rate that equals c.2% per off retirement.

That last line was supposed to read“The rest of us see our pensions tapered away at a rate that equals c.2% per year we are off retirement.”Thus, the 50 year old would get 70% of a full state pension (the equivalent of today’s £95.25), and would have 15 years to make their own arrangements to supplement that amount. I would get slightly less than half a state pension, but would have three decades to prepare for a world where my state pension was meagre.

The issue here is cost.Raising the state pension age gradually may help, but the effect is small compared to the cost of public sector pensions – often given to those that retire at 60 or earlier (I have a friend in the police who is about to retire on a full index-linked pension at age 48 after 30 years service).Sort out over-generous public sector pensions first.

I agree that public sector pensions are a big problem but there is zero chance of reducing payments for these in the near future – they are contractual agreements which cannot be unilaterally revoked by a government adhering to the rule of law. My proposal could make a modest impact in the very near future and a much bigger one over time.

The idea of starting soon and raising the State Pension Age by, say, three months per year for several years has attractions. But if we assume that the ultimate objective is a State Pension Age of 70 (and it may end up being higher), it would take twenty years to reach it — which is quite a long time.Maybe I’m incredibly wealthy, but I delayed the receipt of my own state pension by five years (from 65 to 70) in order to get a bit more each year if I lived that long; and (admittedly with an occupational pension from USS) I haven’t really noticed its absence. I wonder if I’ll notice its presence next year when I am due to reach 70?

There were some revealing results in the First report of the (Turner) Pensions Commission in 2004. Only 7 per cent of respondents said they had a fairly clear idea of how much state pension they could expect in retirement.When people were asked who they trusted to deliver on pension promises, there were four main answers possible: I trust a great deal; I tend to trust; I tend to distrust; I do not trust at all.Deducting the last two from the first two gives net ‘trust’ scores as follows:employers PLUS 40 per cent
pension providers PLUS 14 per cent
government MINUS 67 per cent!This does suggest that people will be suspicious of anything the government proposes.

Raising the pension age by small, incremental stages is an excellent idea. The same could be done with pension credits, which in their present form severely undermine work incentives for the over-60s, particularly those with chronic health conditions which prevent them from working full time. There is a danger that raising the SPA will save little if people are displaced on to a combination of pension credits and disability/incapacity benefits. Indeed, because pension credits are means tested, incentives to save for old age may be reduced still further.

I have often thought that we need to wean people off the state pension. I say wean because we can’t just scrap it; plenty of people are relying on it. To tell a 50 year old that they won’t get a state pension is unfair: they’ve worked for thirty years expecting it, and not prepared for a world without it. But I see no reason why we should not tell a 20 year old that they won’t get a state pension, as they have all the time in the world to make their own arrangements.I suggest a phasing out approach. Anybody over 60 gets a full pension; anybody under 20 gets no pension. The rest of us see our pensions tapered away at a rate that equals c.2% per off retirement.

That last line was supposed to read“The rest of us see our pensions tapered away at a rate that equals c.2% per year we are off retirement.”Thus, the 50 year old would get 70% of a full state pension (the equivalent of today’s £95.25), and would have 15 years to make their own arrangements to supplement that amount. I would get slightly less than half a state pension, but would have three decades to prepare for a world where my state pension was meagre.

The issue here is cost.Raising the state pension age gradually may help, but the effect is small compared to the cost of public sector pensions – often given to those that retire at 60 or earlier (I have a friend in the police who is about to retire on a full index-linked pension at age 48 after 30 years service).Sort out over-generous public sector pensions first.

I agree that public sector pensions are a big problem but there is zero chance of reducing payments for these in the near future – they are contractual agreements which cannot be unilaterally revoked by a government adhering to the rule of law. My proposal could make a modest impact in the very near future and a much bigger one over time.

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