This week, millions of Britons put off their retirement. Or rather, had it put off for them. David Gauke, the Work and Pensions Secretary, announced that the state pension will now rise to 68 between 2037 and 2039, rather than in 2046.
Many people argued that this was unfair. Unfair on poor and manual workers. Unfair on those who lose their jobs late in life and struggle to find a new one. And unfair on those from Glasgow and other areas with abysmal life expectancy who already have far fewer years of retirement to enjoy.
There are indeed many things that are unfair about the state pension. As I pointed out on CapX this week, the “healthy life expectancy” of those born in London’s richest boroughs is 13.6 years higher for men and 17.6 higher for women, compared with those born in its poorest. So the state pension is highly regressive: poor pensioners in Blackpool (and Glasgow) get much less than rich ones in Bloomsbury.
Yet the unfairness comes not from the age at which the pension is set, but its basic design: a uniform retirement age, and uniform rate, for a society that is very far from uniform.
Despite these flaws, the state pension endures because it embodies a grand bargain between citizen and state. We spend X years working and putting in, in exchange for which we spend Y years slacking off and taking out.
The big problem, and the reason for Gauke’s announcement, is that this model simply doesn’t work. Not because of the fact that having a job for life, or even a profession for life, is becoming less common. But because the numbers don’t add up.
As Michael Johnson of the Centre for Policy Studies points out, the money coming in via National Insurance is already substantially less than the money going out. In 2015-16, the relevant fund had to be bailed out to the tune of £9.6 billion, up from £4.6 billion the previous year.
And the situation is only going to get worse. The number of people over the state pension age in Britain is expected to grow by a third between 2017 and 2042. Not only will there be more claimants, but they will be claiming for longer: the average 65-year-old will today live for another 22.8 years, as opposed to 13.5 back in 1948, when the pension was introduced.
To which many people will say: yes, but I’ve already paid in. I just want what’s coming to me.
But it doesn’t work like that. Despite its name, “National Insurance” has never been about piling up credit for your own future. It’s been about paying for the care of the generation above yours, on the understanding that the one below will pay for your own. But a soaring dependency ratio, and greater life expectancy, mean that will be a non-starter.
The fact is that the state pension is a classic example of the way that benefits and entitlements become enshrined as rights. The original principle behind the pension was that it should be paid to support those who physically could not work: it was an act of collective charity.
Gradually, over the decades, this transmuted into a collective feeling that we were all owed a decent retirement – and that the state should pick up a chunk of the tab. Politically, the state pension became the holy of holies, protected via a triple lock that has helped the incomes of the elderly outperform everyone else’s over the past decade.
The Government is hiking up the state pension age because both demographics and economics are forcing its hand. Given its current political plight, it should be congratulated for having the courage to go through with it. But how much better if we all had the courage to have a proper conversation about what taxpayers need and deserve in their old age – and how on earth we can afford it.
This article was taken from CapX’s Weekly Briefing email. Sign up here