Response to State Pension Age Review

by Dr. Ros Altmann

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State Pension Age Review Team
State Pensions Division
Floor 5
Section B
Caxton House
Tothill Street
London SW1H 9NA

4th August 2010

Dear Sir/Madam

I enclose my response to the State Pension Age review. Please also see articles on my website in the Rethinking Retirement Section at www.rosaltmann.com.

I attach, as well, a powerpoint set of slides that may be of interest, showing forthcoming changes in population over age 65, as well as changes in the proportion of life spent working and not working.

My suggestion is that we need to radically rethink both pensions and retirement, in order to optimise results of such policy changes.

With kind regards




Ros Altmann





RESPONSE TO CONSULTATION ON STATE PENSION AGE INCREASE

Dr. Ros Altmann
4th August 2010

Introduction:
A decent state pension requires radical, rather than incremental change. Instead of tiny increases each year, that will still leave a wholly inadequate state pension (about the lowest in the developed world), I believe we should pay a much higher level of flat rate basic pension - perhaps from a much older age - such as 70 or 75 - but keep existing limits for those below this age. At the same time, we must facilitate part-time work and outlaw age discrimination, so more can stay in the labour force. If we fail to do so, the result will be much lower growth, much higher pensioner poverty and potential political and social unrest.

Summary of response:
Accelerating increases in state pension age, in exchange for a higher state pension, are one response to the problems of an ageing population. This policy proposal just one small step in the right direction, at least it is in the right direction!

Policy should have increased pension age in the past, but maintained or improved the state pension as well. Unfortunately, it has done the opposite.

However, I believe we really need radical reform of both pensions and retirement, to sort out our pension system properly. A much higher state pension, paid from a later age, with encouragement of part-time work should be the ultimate policy goal.

Tiny increases in the wholly inadequate state pension are not really enough - we need a much more generous pension than is currently planned, even if it is paid from a later age.

Pensions policy has lagged way behind changes in life expectancy and state pension age should probably have increased to 66 already.

By 2016, life expectancy will have risen by over one year, so increasing state pension age to 66 will not even offset longer longevity then.

The current situation is unsustainable - as the demographic timebomb explodes in 2011.

Past Governments failed to prepare for this, even though it has been obvious for years.

Reforming the labour market will be key to making this policy change work -help people work part-time and cut down gradually.

We should get away from the idea of one particular retirement age - the last Government should not have agreed to a default retirement age of 65.

Increasing state pension age is a useful signal for longer working lives but a more radical reform of state pension and retirement policy is needed as well.

The benefits system already helps those who retire before state pension age and this must continue, to help those who are genuinely too old to work and cannot wait to 66.

Means testing discourages part-time work and private saving and the sooner we reform state pensions to end mass-means-testing, the better.

Question 1: What evidence concerning changes in life expectancy and the changed economic context should be taken into account when bringing forward the increase in state pension age to 66?

Demographic timebomb explodes in 2011.
The demographic timebomb is really about to explode, starting in 2011, with the 65th birthday of the first baby boomers (9 months after the end of World War II). Unless changes are made, the numbers of pensioners will soar and the Government has belatedly recognised the dangers of this. As the baby boom generation is coming up to retirement age now, and as the level of the state pension is so low, millions of pensioners are at risk of living in penury for ever-increasing numbers of years of retirement. As the demographic and fiscal problems are now hitting hard, the need to make changes has become urgent, giving much less time to prepare.

Past Governments failed to prepare for this, even though it has been obvious for years:
The workings of the state pension system have compounded the situation. Since the 1980's the state pension has been consistently reduced over time, such that the Basic State Pension has shrunk to around 16% of average earnings and the additional state pension has been cut back too.

Pensions policy has lagged behind changes in life expectancy:
Pension policy has lagged hugely behind changes in life expectancy and, although women's pension age is already set to rise to 65 by 2020, the changes being implemented are so slow that policy is still lagging behind life expectancy. Indeed, in the past few decades, despite rising longevity, the trend was actually towards even earlier retirement ages than in the past. This has resulted in longer and longer periods of retirement for most people and an unrealistic level of expectations about retirement income. If people are living longer and working for fewer years, they have less time to build up savings for later life. This means they are at risk of lower incomes in retirement. Who will be able to support them? The numbers of younger workers are falling relative to the numbers of pensioners, which will put an increasing burden on taxpayers and risks damaging long-term economic growth.

Evidence to consider:
It will be important to consider evidence on health of people in their 60s and surveys of attitudes to work. Studies of attitudes to part-time work and benefits of keeping economically active should be noted. Also, evidence about income that people may have to live on if they retire at age 65 in future, as opposed to their potential income if they keep working for another year, would be important to consider.

Question 2: When should the state pension age increase to 66?

State pension age should probably have increased to 66 already
Especially given longer life expectancy and better health and working practices in the population as a whole, longer working lives and encouragement of keeping economically active should have been features of policy for many years already. Unfortunately, politicians over past decades have failed to address this challenge adequately and have pretended that we can afford longer and longer periods of retirement, while cutting the generosity of the state pension. Even in the last few years, Government legislated for a Default Retirement Age of 65, which meant workers were encouraged to believe they should be retired by age 65 and were prevented from staying on at work even if they wanted to.

Policy should have increased pension age in the past, but maintained or improved the state pension as well - it has done the opposite:
Instead of maintaining the value of the state pension, but increasing the age at which it starts, politicians kept cutting the state pension, to make it more affordable. It is now far too low. This is the opposite of what should have been happening. In the past, politicians relied on employers' final salary schemes or private pensions to make up for the inadequacies of the state pension, but this system has not worked well for the majority. Some are fine, but most are not. Passing the burden of pension support onto private sector employers and individuals has taken the spotlight off state pension inadequacies for a while. But now that the Government has realised how inadequate the state pension is, it wants to increase it and fears it cannot afford to do so without raising the age at which it starts. This change is long overdue, however, and would make economic sense.

The current situation is unsustainable
Indeed retaining a state pension age of 65 will probably be bad for society and the economy. It wastes the talents of older people, especially in an ageing population. As more of today's baby boom generation reach age 65, they will find they are fitter and healthier than previous generations, as a result of tremendous social and medical advances, and they have many more years of life to look forward to. Why should they be thrown on the scrap-heap, work-wise, at the same age as before? Why should society pay them not to work, when they are capable of working well and when working would actually be beneficial for them and everyone else?

By 2016, life expectancy will have risen by over one year, so increasing state pension age to 66 will not even offset longer longevity then
Even if state pension age increases to 66 by 2016, the average life expectancy by then will have risen by over one year, so length of retirement will still be longer than now. The Government's plan to increase state pension age to 66 by 2016 is an effort to tackle the rising cost of state pensions and to permit a more generous state pension. This aim is laudable and a more generous state pension, without mass means-testing, is vital to a better functioning pension system.

Reforming the labour market will be key to making this work
However, if those aged 65 cannot find work, they could be forced onto benefits instead, which will not necessarily solve the problems. Indeed, even now, most people have retired before they reach state pension age anyway, so the actual chronological pension age is not as relevant as the environment in which it operates. At the moment, those who have little or no other income, who retire before age 65, are entitled to Pension Credit of £130 a week, which is much higher than the full Basic State Pension of £97-65. Therefore, raising state pension age may simply mean more people aged 65 living on Pension Credit for a year, which could cost even more than the state pension. Private pensions which are not final salary or defined benefit arrangements have generally not generated enough income for people to live comfortably in retirement, as investment returns and annuity rates have been much lower than expected.

Help people work part-time and cut down gradually
It is vital that an increase in state pension age is accompanied by measures that ensure people can stay in work longer - particularly in part-time work. The ideal would be that policy ensures employers make part-time work available to older workers who are mostly fit and capable of working into their 60s and even in their 70s, with plenty of experience and skills to offer.

Get away from the idea of one particular retirement age
We need to get away from the idea that there is any one particular age beyond which people can suddenly do no work. We should ensure that a whole new phase of life opens up, when older people remain economically active, but do not have to struggle to work full-time. Two or three days a week working, four or five days a week free, is a much better lifestyle and will also be better for the economy as a whole. Older people will earn more money, pay more taxes, have more time to save and more money to spend. That will increase economic growth, to the benefit of all.

Increasing state pension age is a useful signal for longer working lives but a more radical reform of state pension is needed as well
For this to happen, an increase in state pension age would be a useful signal to individuals and employers that longer working lives are desirable. We need to change social attitudes and ageism in the workplace as quickly as possible. However, really radical state pension reform would be even more useful. Paying a much higher, non-means-tested state pension from a later age would help people understand and plan for a phase of part-time work in later life, a new phase of life that previous generations could not have enjoyed.

Question 3: What evidence should the Government consider to ensure no group is disproportionately impacted by the level of the state pension age and any change to the timing of the state pension age increase to 66?

Geographical and occupational variations in life expectancy
Government should consider the evidence surrounding geographical and occupational differences in health status and life expectancy. It should also consider how means-tested benefits impact older citizens and whether the system penalises saving for retirement, as well as part-time working.

Benefits system already helps those who retire before state pension age
The major concern about raising state pension age is usually around those who are genuinely unable to work, perhaps due to health issues, or after a lifetime of heavy manual labour. However, in most cases such people are already retired before the current state pension age anyway and many of them are supported by means-tested benefits. Therefore, we do already cater for the needs of those who are physically unwell and need to retire. Indeed, means tested benefits pay far more than the full Basic State Pension, so raising the state pension age will be irrelevant for many such people.

Means testing discourages part-time work and private saving
A big problem surrounds the issue of means testing, as those who have saved in a pension or have other savings may find that they cannot get the means-tested benefits they would otherwise have if they had not bothered to save. In addition, the means-testing system also discourages them from working part-time, since the earnings disregard for pension credit is just £5 a week. The system should not be discouraging part-time work in this way and a review of the state pension age should be coupled with a review of benefits for older members of society.


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