Nobody wants to admit that the state pension is almost bust

·6 min read
Hunt Sunak
Hunt Sunak

When your party has been in power for over a decade and the tent is caving in, there is one rule that applies before all else: don’t upset your voter base. With this in mind, it’s not surprising that Chancellor Jeremy Hunt is expected to kick the decision to raise the pension age into the long grass.

The pension age is set to rise to 68 after 2044 but Hunt reportedly wanted to want to move faster, bringing forward the rise into the late 2030s – following on from advice given to the Government through an independent report back in 2017. But such a move risks ruffling the feathers of voters in their fifties, 49 per cent of whom voted Tory in the 2019 general election (compared to the 28 per cent that voted Labour). No such move is expected now until after the election – if it happens at all.

To get hawkish on the state pension is unpopular at the best of times. It’s the kind of thing Conservatives like to talk about when they’re under zero pressure to implement change (Liz Truss mentioned plans to change the pension age in her long essay for The Telegraph, despite insisting in the last days of her premiership last year that she was committed to the triple lock).

Unfortunately we don’t have the luxury of waiting for the political weather to change to get serious about pension reform. No one, especially the Government, wants to admit that the state pension is on a pathway to going bust. But the longer we hold out discussing how fragile the system is, the worse the problem, and our finances, are likely to become.

Perhaps the crux of the issue is that the state pension is built on a dangerous lie: that today’s pension payments are paid for out of accumulated contributions, over many decades of work.

It is certainly the case that workers pay into the system, and wholly reasonable that they expect to see something for those contributions once they reach retirement age. But these contributions have not been hypothecated, despite the claims behind National Insurance. NI is nothing more than a glorified second income tax. Those contributions are spent.

The state pension is instead a “pay as you go” scheme, funded by general taxation. As demographics swing towards more retirees and fewer workers to contribute to the income tax base, the system becomes increasingly fragile. Pension pay-outs swallow up an ever-growing proportion of state spending.

At some point, this becomes unsustainable. According to the Office for Budget Responsibility's latest calculations produced for the Budget last week, pension spending will come to £125.2 billion for this fiscal year – a total that starts to rival what we spend on the National Health Service. By 2027-28, this jumps to £160.4 billion.

This is where the “triple lock” on the state pension takes us (which sees the state pension go up by inflation, average wage growth or 2.5 per cent, whichever is higher). Even if we were to factor in a decent level of economic growth over this time frame (and that’s a big if), the cost of pensions is only going up.

One of the most frustrating aspects of this debate is that, behind closed doors, there is widespread acknowledgement in the Tory party that the triple lock is not just unsustainable, but unfair. And there was a time not too long ago when there was serious talk of abandoning it.

Back in autumn 2020, when then-Chancellor Rishi Sunak was preparing for the March 2021 Budget (the risk of inflation already on his mind), he tried to muster up some political will within the cabinet to tackle the triple lock. The argument made was that lockdown intensified intergenerational unfairness in the UK: younger workers had been cooped up in small, rented flats and shared accommodation, were placed on furlough, and lost out on job opportunities. If there were ever a time to address the financial unfairness of the triple lock, this was it.

Unfortunately then-prime minister Boris Johnson squashed the plans, along similar lines being used now: it wouldn’t be popular with the Tory-voting base. But it also won't be popular when the system starts falling apart, and change is required in a much shorter time frame.

If the triple lock remains untouchable, the point will come when we have to radically reduce who is eligible to receive it. This could mean an age hike higher than 68, with far less time to prepare. Already we are putting in more and getting out less. A report from the Resolution Foundation found that a taxpayer born in 1996 will get, on average, less than half the net welfare that someone born in 1956 will receive (of which the state pension is the biggest cost, expected to make up over 40 per cent of welfare spending this fiscal year).

One argument for stalling on the pensions age change this time around is that the pandemic saw life expectancy fall by one year for women, and just over one year for men. This sad fact has very little to do with the pension age and is being used as an excuse not to address the problem. Evidence continues to mount, showing that people are better able to work into their 60s and 70s, and also that doing so has health benefits. Perhaps most importantly, life expectancy remains far above the retirement age.

We are in a vicious circle where an ever-growing number of retirees receiving pension pay-outs will lead to an ever-rising proportion of public spending going on pensioner costs. It’s generous so long as it lasts, but its price tag risks making less available in the future, especially for the pensioners who really need the support.

Refusing to tackle the retirement age risks a de facto deprioritising of other things, not to mention preventing serious personal or business tax cuts. Continue on this path and you get a single-purpose economy: current workers propping up pensions and the NHS, hoping the next generation will be willing to do the same when their turn comes around.