Is the state pension now unsustainable?
The question of who pays for our retirement has become a political time bomb. Former Pensions Minister Ros Altmann and Schroders' Head of Retirement Lesley-Ann Morgan debate the issue
Illustration: Andrea Ucini
Important Information: This article was written by The Times, all views and opinions are those of the publication unless otherwise stated. The views and opinions are those of the authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
Some 75 years after the Beveridge Report laid the foundations for the welfare state, including the introduction of the basic state pension, the UK is utterly changed. In particular, while the typical man died at age 63 back then, life expectancy for children born today is around 80. So the cost of state pensions keeps on increasing.
As a result, the country is struggling to foot the bill. The Organisation for Economic Co-operation and Development warned last year that the UK already has the least generous state pension of any developed economy in the world. The Government Actuary’s Department says funding for state pensions will run out by 2032 without a revamp of the national insurance system.
One response could be to dump the idea of universality. Perhaps state pensions should be means tested and then increased for those most in need of the money? At the very least, maybe we have to drop the triple-lock guarantee, which promises that state pensions will rise each year by at least 2.5 per cent, or by wage or earnings inflation if either is higher.
The counter argument is that workers have made national insurance contributions for decades on the basis of the current system, so to introduce means testing now would be an unforgivable betrayal. Even getting rid of the triple lock will be politically tough.
In which case, successive governments will need to think harder about how to finance state pensions – they may even have to make the system more generous.
So we asked the experts: Is the state pension now unsustainable?
Yes, it is
Julian Jessop, Chief Economist, Institute of Economic Affairs
It is widely recognised that the state pension is not sustainable in its current form – as the Office for Budget Responsibility’s latest Fiscal Sustainability Report makes clear. This fact is driving increases in the state pension age, and this may need to go still higher alongside other reforms including ending the triple lock.
It would be a mistake to try to make the scheme more generous. The UK state pension is relatively low, but this is offset by a much larger system of private pensions. If overall retirement incomes are considered insufficient, the government should focus its efforts on boosting private provision further.
In the long run, it would make sense to restrict the state pension to those who really need it, as with other benefits. But this probably cannot be done quickly, because people who have been paying national insurance contributions (NICs) for many years could reasonably expect to receive a full state pension in return.
There may be other ways to find savings, most obviously by removing the exemption from paying NICs for those over the state pension age. With many older people working and earning longer, this change is long overdue.
No, it isn’t
Baroness Ros Altmann, Former Pensions Minister
A state pension is essential as the basis on which to build private income. Scrapping it would disincentivise private saving and is a recipe for rising pensioner poverty.
The UK national insurance system collects premiums in exchange for the promise of support during times when citizens are unable to work. The aim is to ensure that society offers at least some minimum support after a lifetime of work. It is part of our country’s social contract.
The state pension pays only the bare minimum. To suggest our country cannot afford even that is misguided. Of course, with an ageing population support costs will increase. But without a state pension we would still need means-tested support for those with private resources who would otherwise face destitution.
A situation would arise whereby people planning their income in later life could be penalised for saving, so fewer will bother. Those who didn’t save would receive state payments, while others who put money aside for retirement would get nothing. That is unsustainable. To control costs, policymakers can adjust the age at which the state pension is paid, or the amount, but scrapping it would be a great mistake.
Plan for your own future
People are wising up on pension options, says Lesley-Ann Morgan, Head of Retirement at Schroders
The promise of a state pension is etched in the British psyche, but just how much that will amount to in future decades is uncertain. But perhaps there is a growing awareness of this. Two years ago, the average British investor expected the state pension to provide 19% of their retirement income, according to the Schroders Global Investor Study. By last year, the figure had fallen to 16%.
The research also found that investors expect company pensions to be the main single source of income at 30%. Other sources included 17% from savings and investments, and 11% from a personal pension. This suggests people are taking the wise approach of building up a healthy mix of income sources.
Each method has its merits. Company pensions should come with a contribution from an employer. Pensions in general, be it a work or personal plan, have generous upfront tax benefits, but come with some restrictions. Savings and investments can be more flexible and ISAs can make this route tax-efficient, especially when taking money out.
A financial adviser can help with these choices. But making a commitment to save as much as you can, as early as you can is key. Each pound saved today will contribute to your level of comfort in retirement.
The notion of a state pension may be comforting, but on its own it is unlikely to provide the comfortable living most people are hoping for.
Read more about how Schroders’ Retirement Strategic Capability is aiming to improve people’s retirement journey.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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