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Is it fair to increase the pension age when it’s the rich who benefit most?

Newspaper article

The case for change is well rehearsed. We are living longer, much longer than in 1948 when the basic state pension was put in place. Back then a 65-year-old man — and many fewer reached 65 in the first place — could expect to live another 12 years. Today he can expect to live 21 years, while 65-year-old women can expect 24 more years of life. Further substantial increases in life expectancy are predicted. Yet the male state pension age remains where it was in 1948 and the female pension age is only just catching up with that for men.

The result is that a growing fraction of the population is receiving a state pension and a growing fraction of national income is going to support this older population, not simply to pay for pensions, but health and social care, too. Most of this is conveniently ignored most of the time. We are carefully not thinking about how to fund it. We completely lack the capacity to have a sensible debate about managing spending on health and social care. But we do now have a policy on the pension age, linking it with life expectancy. The government’s stated objective is that we should expect to spend on average up to a third of our adult life in receipt of the state pension.

That is quite an ambition. It is far more than originally intended by the architects of the welfare state. A pension age of 68 in 2037 looks generous compared with one of 65 in 1948, or even 1980. It wouldn’t be hard to make the case for a more draconian policy. We are still baking in nearly all the increases in time spent on the state pension resulting from recent increases in longevity. There have been manifold failures of communication, which mean too many people still don’t know when they will become eligible for a state pension. But our long-term planning in this respect at least looks impressive compared with the sharp and much quicker increases in pension age legislated in many other countries.

But is the proposed increase in pension age fair? It’s all very well dealing in averages, but the rich live longer than the poor and a higher pension age hits the poor hard. Those 65-year-olds in the highest social classes can expect to live five years more than those from poorer backgrounds. There are even bigger gaps in healthy life expectancy. A 65-year-old woman in the most deprived areas of England, for example, can expect to live only six years in good health, while one in the wealthiest areas can look forward to 13 years of healthy life.

Differences in health and life expectancy are undoubtedly among the most dramatic and worrying manifestations of economic inequality. They also mean that the lifetime rich receive more in state pension payments than do the lifetime poor, simply because they live longer. Yet that is not a new phenomenon, so is not in itself a good argument against raising the pension age across the board. It might argue for differential pension ages, perhaps higher for those with higher levels of education or higher lifetime earnings.

We need to be clear why, though. It can’t just be because the rich get more in state pensions: that is far outweighed by their higher tax payments and national insurance contributions. Fairness must always be judged against the system as a whole, not individual elements in isolation. At best, a lower state pension age for some would be a poorly targeted treatment of the symptoms of a much deeper problem, not any kind of solution.

What about the fairness, however, of expecting those engaged in heavy manual work, or dull and repetitive work, to carry on working longer? If they are unable to find work that they want and can do, they will suffer additional years of hardship before the state pension kicks in. This has been the experience of many women in their early 60s as the female state pension age has risen. Yet others have remained in paid work for longer and, at more than £5 billion a year, the savings to the public finances are already large.

What is certain is that having more people in their 60s in paid work is possible. A much smaller fraction of men in their 60s are in work than was the case in the early 1970s, when tough manual jobs were much more prevalent and life expectancy much lower. A 60-year-old man today has half the chance of dying this year than a 60-year-old in the mid-1970s, and yet is 25 per cent less likely to be in work. We may decide perfectly reasonably to work less as we get richer, but we should lay to rest the idea that we are unable work more.

In the end we will, as always, have to make trade-offs. We have already decided, by default, to extend the period that people spend as pensioners rather the time they spend in paid work. Some rebalancing will allow us to afford higher pensions, or have lower taxes than otherwise. But the real worry surely should be why so many people still reach their 60s with such poor prospects for either worthwhile employment or a long and healthy life

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 @PJTheEconomist