Don’t raise the state pension age – scrap it

The Institute for Public Policy Research (IPPR) is one of several organisations proposing that the state pension age (SPA) should be raised to 67 (1). The recent IPPR report, Working Later, usefully recognises that since we are living longer, healthier lives, there is less reason why the age 65 should be seen as sacrosanct in discussions about retirement income.

However, the proposal in its current form has several drawbacks. For a start, a higher SPA will cause additional hardship for many people unable to continue working in their early or mid-sixties. More fundamentally, the report shares the common misconception that bringing about a better life for older people would entail an excessive financial burden for society.

In recent months a common view has emerged that the first step in UK pension reform is to raise the state pension to the present Guarantee Credit level of about £110, and then link it to earnings. There is no doubt that this would provide a better – if still not fully adequate – financial deal for elderly people. However, the IPPR goes along with the mistaken presumption that this is unaffordable without trade-offs, or financial sacrifices of some type. From the IPPR’s perspective, the trade-off is to delay payment of the pension for two years. This is ‘vital’, according to the report’s author, Peter Robinson, ‘if the UK pensions system is to remain sustainable and cope with the pressure of an ageing population’.

In proposing this complementary rise in the SPA, the IPPR is effectively endorsing government objections that implementing a higher basic state pension on its own would be too costly. This notion informs most contributions to the debate around pensions reform, including the keynote Turner Commission on pensions, due to publish its final report this autumn (2). As long as it remains so widely accepted, the government will have an easier job rejecting any progressive proposal for pension reform on the simple grounds that ‘we can’t afford it’.

But such trade-offs are financially unnecessary. Britain is a prosperous country and is becoming more so all the time, even if at a disappointingly sluggish rate recently of only about two per cent a year. Rising productivity means that we can easily cope with an ageing population in the future, just as we have done with population ageing over the past century or so. This is about imaginary limits, not real material constraints.

The IPPR report notes that people distrust the government and other institutions on pensions. Leaving aside that this is perhaps a legitimate response given successive governments’ backtracking on promises and cuts in pensions, a useful step in building public trust would be to promote a more realistic perspective on ageing. Trust within society is not best served by repeating myths about how proper pensions would be unaffordable, which only encourages greater anxieties and negativity about old age.

The cost of an immediate increase in the state pension to £110 is calculated at about £7billion, which in an economy with an annual output of well over £1,000billion is a little over 0.5 per cent of GDP. This is a lot of cash to you or me, but a relatively small amount for the world’s fourth or fifth largest economy. It should be possible to absorb in a public budget of around 40 per cent of GDP. If our politicians can’t fathom a way to do it, and if they do not want to borrow to cover it, then they should show the courage of leadership and argue for any short-term tax increase it may require. Surely a modern government should be able to justify providing a basic foundation for the living standards of elderly people?

The IPPR report is titled Working Later, but it deflects attention from the real problem with later working – that there are not enough good jobs for people who are able and willing to work later in their lives. Many older, healthier people will want to work later out of choice, not simply as a way of avoiding financial hardship. IPPR’s focus groups reportedly found that people feel that they should be able to choose when and how they retire, rather than being dictated to by government.

The IPPR implies that this expresses a problem of distrust in government – but in fact it is a positive sentiment. And the biggest barrier to exercising choice is not the ‘pressure of an ageing population’, nor distrust of government, but the dearth of reasonable jobs. We should remember that the effective age of retirement for men is already a couple of years below the SPA, reflecting primarily the impact of being made to retire early. Postponing the age of state pension entitlement does nothing to ensure that those jobs become available.

On its own, the IPPR’s proposal is therefore simply likely to prolong the time many people without jobs are forced to rely upon unemployment or incapacity benefits. This might alter the form in which older people receive state benefits – without even saving the Treasury that much, if any, money – but it does nothing to improve employment opportunities and genuinely extend the individual choice of when to retire. Focusing on the age of entitlement distracts from the real economic and social problem of a lack of employment opportunities for older people, especially in the more economically deprived areas. In Britain before the second half of the 1970s more than four out of five men between 55 and 64 were usually in jobs; today it is less than two out of three. This is an economic problem, not one of ageing. Creating jobs for people who want them is the main issue here.

Moreover, the focus on setting a particular age for pension entitlement also perpetuates a key problem with the way society treats older people. This is the notion that at a certain age people suddenly turn from being active productive members of society into dependent burdens. Getting rid of a set SPA – whether 65 or 67 or even 70 – and the connotations that go with it, would help to reverse the stigmatisation of old age (3).

People should be able to choose to take their state pension at any point over a band of time, between, say, the ages of 60 and 75. Payments could be adjusted to balance out over the average lifetime, so that taking the pension earlier means a smaller annual amount and taking it later means a larger amount. This involves an extension of the existing system for state pension deferral.

Given that we are growing older in a healthier and fitter state than ever before, we should be seizing this opportunity – not seeking to cut further the cost of state pensions by delaying payment, but changing retirement from a forced, sudden event to a gradual, voluntary process. The divide between work and non-work for the elderly does not need to be the cliff edge it has been for the past 100 years. Raising the SPA reinforces the notion that ageing is an economic and social problem – which is the real barrier today to improving the condition of elderly people.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA)).

(1) Working Later: Raising the effective age of retirement, published 25 July 2005

(2) See Pensions: Challenges and Choices the First Report of the Pensions Commission; and Turner report: an old story, by Phil Mullan

(3) Work till you want, by Phil Mullan