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Fairness is a moveable feast when it comes to the state pension age

Date: 18 October 2016
Authors:
Publisher: The IFS

Do you know at what age you will start receiving the state pension? If you think it’s 65, then, unless you are already 62 years old, you’d be wrong. Pension age for men and women will rise to 66 in 2020 and to 67 in 2028. What the pension age will be for people like me, born after 1961, we don’t yet know.

The legislation says that the next rise, to 68, won’t come until 2046, by which time I will, with luck, be nearly 80. However, in all likelihood it will change again before then.

The government has committed to raising the state pension age as life expectancy continues to increase. To be precise, the idea is that people should, on average, receive a state pension for a third of their adult life (over age 20). On the latest estimates, that would imply a rise in pension age to 68 by 2041.

That’s a remarkable commitment. It locks in virtually all the improvements in longevity over the past half-century as additional time in retirement. A third of adult life in retirement is a lot.

Given that we spend more on the state pension than anything other than the NHS, the choice of pension age matters. So last week’s report for government aimed at informing decisions on pension age was an important one. As you’d expect, the report, from former CBI boss John Cridland, sets out the facts on how life expectancy has been increasing and how it is likely to continue rising.

And pretty remarkable some of those facts are. Men turning 65 today can expect to live for another 21 years, while a 65-year-old woman can expect 24 more years of life. That’s almost double the expected length of life for 65-year-olds back in 1948, when the basic state pension was introduced. By the mid-2040s life expectancy is forecast to have risen further to 25 years for 65-year-old men and 27 years for women.

The failure of state pension age to keep pace with longevity tells only part of the story. Most leave the labour market before they reach pension age and, while they have been rising recently, for older men employment rates remain below their level 40 years ago. Fewer than two thirds of men aged 60 are in paid work compared with more than four fifths in the early 1970s. This has happened despite increases in life expectancy and changes in the labour market, which have massively reduced numbers working in physically demanding jobs.

There are lots more statistics I could quote, but there’s not much need. The basic facts, including about increasing future costs of pensions, are clear enough. The question is what to do.

Mr Cridland is not short of questions. He asks for responses across 26 broad areas. Many arise from the observation that different groups enjoy different levels of private pension income, different health and different life expectancies. Those things are often closely correlated. Greater wealth, better health and longer life tend to go together. Men from the richest areas of England, for example, can expect to live more than 20 years after turning 65; those from the poorest areas only 15 years.

Among the plethora of questions to consider is the rather radical one of whether we should abandon the idea of a single pension age and have one that varies, for example by level of education or years spent in paid work. If we know that some, generally poorer, groups will live less long than others, is it not plain fair that they should be able to claim their pension earlier? One problem, of course, is that averages hide a lot of variation: some rich, highly educated people die young. And what do we mean by “fair”? The richer and better educated do live longer on average and therefore receive the state pension for longer, but they are still big net contributors to the public finances.

Maybe that balance is part of fairness. If we are going to talk about fairness, we can’t consider the pension age in isolation. We might want the tax and welfare system to be even more redistributive than it is at present, but is having a variable state pension age really the best way to do it?

I doubt it. In the first place, it’s hard to see how you could do it fairly (that word again). You certainly couldn’t do it according to where people live. Plenty of poor people live in rich areas and vice versa. You might be able to do it according to when they finished education, but what would you do about those who go on to study later in life? In any case, more penalties for going to university may look unattractive. And again the effect would be pretty scattergun.

There is a more fundamental objection. The age you become eligible for state pension acts as a hugely important signal as to when to retire. Making the pension available earlier would be great news for those who can’t work, but it would also encourage many who could have carried on to stop work earlier and thereby reduce their incomes in retirement. While we need to support those who can’t work, in general we are much better off doing all we can to improve opportunities and support people to continue in work, building on the gradual increases in later life working that we have seen in the past 20 years.

Encouraging more people into a longer and less prosperous retirement would be expensive to the population as a whole and would be counter-productive for the wellbeing of many of those apparently benefiting. We should be wary of such proposals, however “fair” they may appear.

This article was first published by The Times and is reproduced here in full with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on Twitter @PJTheEconomist