Paying for the State Pension

In 2016/17 the State Pension accounted for around £93 billion of Government spending – around 43% of total spending on social security and tax credits in Great Britain. Total social security expenditure directed at pensioners, of which the State Pension made up the vast majority (78%), was around £119 billion. This made up over half (56%) of total social security and tax credits spending.

Due to an increasing number of people reaching State Pension Age (SPA) and because life expectancy is longer, current projections are for spending on pensions as a proportion of GDP to rise from 5.2% now, to 6.2% in 2036/37, 6.3% in 2046/47 (when the SPA will be 68) and 7.1% in 2066/67 (when the SPA would be 69).

Faced with an ageing population, society has choices: e.g. the share of taxes devoted to pensions must rise; or, as widely debated in the last Parliament, the SPA must rise or the uprating arrangements be less generous.

Chart showing WP expenditure on pensioners from 1978 to 2018

How should the State Pension Age change in future?

From the 1940s until 2010, the SPA was static: 60 for women and 65 for men. Legislation to increase it was gradual, with the Pensions Act 1995 providing for women’s SPA to rise from 60 to 65 between 2010 and 2020, and the Pensions Act 2007 increasing the equalised SPA in two-year stages, one year each decade, reaching 68 by 2046.

Chart showing state Pensions as % of GSP

The Coalition Government accelerated the increase to 66, arguing that life expectancy had increased. This was controversial – particularly among women born in the 1950s – because it meant short notice (in some cases as little as five years) of increases of up to 18 months, on top of increases in the 1995 Act of which many women said they had not been adequately notified. This led to the WASPI campaign, calling for ‘fair transitional arrangements’.

The Government then brought forward to 2026-28 the increase to 67 and, to aid transparency in future, provided for SPA reviews every five years. The aim was for people to spend up to a third of adult life in retirement and get at least ten years’ notice of any change.

The Cridland Review

An independent report by John Cridland recommended an increase to 68 between April 2037 and 2039, with no further change for ten years unless there were exceptional changes to data. Alongside this, the Government Actuary estimated the timetable needed to maintain the proportion of adult life in retirement at 32%.

 Chart showing teh changes to state pension ages

Because some people (e.g. carers and people with disabilities) were disproportionately affected by SPA increases, Cridland recommended allowing access to the means-tested Pension Credit one year before SPA (when it rose to 68) and adjusting the conditionality in working age benefits for those approaching retirement.

Criticisms of the review were that:

  • The case for an increase to 68 in the late 2030s was not strong enough, particularly given that the UK would already have a higher pension age than many other countries.
  • It would affect people now in their late 30s and 40s, many of whom did not have final salary pensions and had limited opportunity to build up auto-enrolment pensions.
  • The proposed mitigation was inadequate.

The May Government would have announced the outcome of its own review by 7 May 2017 had the General Election not intervened.

The end of the triple lock?

The triple lock is a government commitment to uprate by the highest of earnings, prices or 2.5%. It applies to the basic State Pensions for people reaching SPA before 6 April 2016, and the new State Pensions for people reaching SPA after that date.

Cridland said his SPA proposals were close to the limit of what could be saved in that way and that further savings to ensure sustainability should be made by ending the triple lock in future. The Conservative manifesto pledged to replace it with a double lock from 2020; the other main parties committed to retain it for this Parliament.

Our calculations show that, unless forecasts change, replacing the triple lock with a double lock (the highest of earnings or prices) would not reduce State Pension spending over the 2017 Parliament: in both cases, it would cost an estimated £85.6 billion in 2021/22. Scrapping both the triple lock and the earnings link and instead uprating by the Consumer Prices Index might, according to current forecasts, save £2.3 billion a year by 2021/22.

In the longer term, retaining the triple lock would add to expenditure, accounting for 0.9% of GDP by 2066/67 according to Cridland.

While some say that its withdrawal would be fairer to younger people, others say the triple lock would protect the value of the State Pension in future, reducing the extent of private pension saving they need to make and providing a degree of inflation protection which many will not get from their private pension. The new government is likely to want to look again at the impact of both policies over time.

 

 

Read more about the State Pension age review and the State Pension triple lock in these Library briefings.

This article is part of Key Issues 2017 – a series of briefings on the topics that will take centre stage in UK and international politics in the new Parliament. More Key Issues posts will be published on this blog throughout July, subscribe via the homepage to get instant alerts.