Raising the state pension age risks trapping millions in poverty

The French are rioting over changes that will leave their public pension system vastly more generous and expensive than ours.

Their government wants to increase their pension age from 62 to 64, and on average they live longer than we do. We have already raised the state pension age to 66, and it’s heading to 67 this decade. All that without a hint of a riot or a government being toppled.

Even so, press reports last week suggest that a further increase in the pension age — to 68, previously planned to come in between 2037 and 2039, is likely to be delayed by seven years.

Things do change — in this case projections of life expectancy — and it’s good to remain flexible in the face of change. On the other hand, this choice will affect those already in their fifties who need to be able to plan for retirement with some degree of confidence. Knowing when the roughly £10,000 a year state pension will kick in matters. As for the government, and hence the taxpayer, delaying the rise in pension age will cost north of £60 billion.

If the reason for this particular change of plan is less optimistic life expectancy projections it is important to be clear what that means. So, let me try to set out the facts.

Life expectancy at age 50, for people born in a given year, has fallen since 2006. For example, a man born in 1971 who made it to age 50 would, under the 2006 projections, be expected to have a life expectancy of 86.3. Under the 2016 projections that had fallen slightly to 85.6, and under the latest 2020 projections it had fallen to 83.9 years.

Those are pretty serious reductions, especially between 2016 and 2020. As someone currently in his fifties they are pretty depressing too. The 2016 projections are important because those were the ones used to justify the policy of raising the pension age between 2037 and 2039 rather than waiting until the mid-2040s.

However, and bear with me here, these reductions in forecast life expectancy for a particular cohort are not reductions in life expectancy as we might normally understand it. It remains the case that people born more recently are expected to live longer than their predecessors.

A man born in 1971 who made it to 50 is now expected to live about two years longer than one born in 1951 and nearly six years longer than a man born in 1931. Women have made similar, if slightly less spectacular, gains.

Men who make it to 50 will receive the state pension for many more years than was the case in the past. For example, those born in 1910 received it for about nine years on average. That rose to 13 years for men born in 1930, to 17 years for those born in 1950 (for all of whom the state pension age remained at age 65).

For all those cohorts rising longevity simply led to more time enjoying retirement with no rebalancing of pension ages. Raising the pension age to 68 would mean that men born in 1980 should still get 17 years’ worth of pension.

Because women’s pension age was only 60 as recently as 2010, later cohorts of women will receive the pension for a shorter period than their predecessors. On the other hand, they are vastly more likely to actually receive a full state pension.

What all this tells us about exactly when next to raise the pension age is a matter of judgment and trade-offs, not least the cognisance of that £60 billion bill for delay and the impact on those who have to wait an extra year for their pension. We have a pretty good idea of what that impact might be from looking at the experience of pension age increases.

Most obviously people lose £10,000. A lot for some, rather less important for the well-heeled. Some will retire later as a result. Research at the Institute for Fiscal Studies suggests that raising the state pension age from 65 to 66 for men and women resulted in an extra eight in every hundred 65-year-olds being in paid work.

They will generally more than make up for the financial loss but at the cost of a loss of a year in retirement. The other 92 per cent will have suffered a financial loss.

The most striking finding of that work was that raising the pension age from 65 to 66 led to about a quarter of 65-year-olds ending up in poverty, more than double the fraction in poverty the year before. And therein lies perhaps the biggest barrier to an ever-increasing pension age. For those without other resources there is now a vast chasm in the amount of support to which they are entitled as they move from just below to just above state pension age.

Support for pensioners has increased over recent decades while since 2010 support for those of working age has been pared back. Twenty-five years ago, the minimum income available to someone over pension age was worth 50 per cent more than that available to someone under pension age. There is now a gap of well over 100 per cent. The result is much higher poverty rates among 60 to 65-year-olds than among those aged 66 and over.

For many millions, the date at which state pension benefits kick in has become more important, even as it has become less important for those with substantial private means. Some extra support for those struggling in the years before state pension age would reduce hardship.

It might also unlock tens of billions of savings by allowing us to stick with current plans to raise the pension age in the late 2030s rather than the mid-2040s.

This article was first published in the Times and is reproduced here with kind permission.