From the TUC

Steve Webb’s pension age dilemma

11 Sep 2011, by in Pensions & Investment, Uncategorized

Steve Webb is today hinting that the government will introduce a further increase in the state pension age  to 67 by 2026. This may provide slightly more notice than the government has given to women, but is not likely to be very popular.

Steve Webb’s dilemma is that he undoubtedly wants people to have decent pensions when they retire, but the Treasury will not give him any extra money. Reducing the number of people eligible for a state pension allows a higher pension to be paid to them at the same cost to the Treasury.

But increasing the state pension age does not extend anyone’s working life. If it meant everyone had a chance to carry on working in a decent job they liked for another year, it would be an easier message to sell.

This however is not going to happen, and the impact will be unfair.

Any increase in the pension age means that a higher proportion of the money spent on pensions goes to those with longer life spans. To take an extreme example an increase from 66 to 67 will halve the amount of pension paid to someone who dies at 68, but reduce it by only five per cent from someone who dies when they are 88.

If life expectancy was entirely random there would be no problem with this. It’s an example of risk sharing (even if living a long time is an odd thing to describe as a risk.)

But longevity is strongly related to social and economic factors – and getting more so. While people are living longer, the gap between life expectancy of those in better off areas and those in deprived areas is getting bigger.

According to the most recent official statistics, in just four years:

The gap between the health areas with the highest and lowest life expectancies at birth increased over the period from 9.8 to 11.3 years for males and from 8.2 to 10.1 years for females. At age 65, the gap increased from 6.7 to 8.5 years for men and from 6.3 to 8.3 years for women.”

Those in decent jobs may be both able and willing to postpone their retirement. Even if they don’t they are much more likely to have the savings or a non-state pension that will allow them to have a reasonable standard of living before they get their state pension. They will probably be better placed to phase their retirement too, perhaps working part-time or in less stressful jobs in the run-up to collecting their gold-watch.

But most people are not so lucky. The worst effect of an increase in the state pension age will be for those who in their late sixties who are not quite old enough to get a pension, but are not working.

Last time I looked at the stats,  more than half of men are economically inactive at 64, the year before they get a state pension now.

Of course some will be perfectly happy early-retirees with proper pension arrangements. But many will be lower-skilled people who find that they can no longer get or do the physically demanding jobs that they used to do.

Many may not be ill or disabled enough to meet a rigorous ATOS test, but are no longer fit or in the best of health. Our benefit regime is far less generous than it has been, and is based on the idea that every claimant should be treated as a work-shy scrounger. However it is highly likely that many of these 64 year olds have held down jobs for most of their lives. That may be even more true for tomorrow’s 66 year olds. An increase in the state pension age will mean that for those years immediately before they retire their income will be very low, and they will be in a tough regime that is looking for ways to reduce it further.