BRITAIN’S state pension system is generally agreed to be a mess—at once too complex and too mean. The basic pension replaces just 37% of the median retiree’s working income, compared with 61% in the average OECD country. Workers are confused about what their retirement income will be; a survey by the Department for Work and Pensions found that 63% agreed with the statement that: “sometimes pensions seem so complicated that I cannot really understand the best thing to do.”

On January 14th the coalition government unveiled sweeping reforms, scheduled to take place in 2017, which would give most retirees a standard pension of £144 ($231) a week, compared with £107 under the current system. The earnings-related state second pension, introduced in the 1970s, will disappear. The number of people requiring means-tested top-up benefits to bring their retirement income up to a decent level—a fiddly innovation of the last government—will fall sharply.

This goes against the grain of the coalition’s other welfare policies, which have moved away from universal provision to means-testing. Child benefit, for example, will no longer be paid to couples where one spouse earns more than £60,000 a year. But means-testing reduces the incentive for poor people to save for retirement. Benefits are currently withdrawn quickly for those with savings income, resulting in a high effective marginal tax rate. That is particularly intolerable now that the government is bringing in auto-enrolment, under which employees will be automatically signed up for employer pension schemes.

The usual problem with universal benefits is the cost, but this reform will reduce the government’s bill over the long run. Without it, the cost of state pensions would have risen from 6.9% of GDP in the current tax year to 8.5% by 2060; these reforms will keep the cost down to 7.9% or 8.1% depending on how generously the flat-rate pension is uprated. Those workers who currently contribute to the state second pension will be able to keep the benefits accrued by 2017 (although they will receive a less generous form of inflation protection). After that date, however, if they want more than the £144 basic pension, they will have to fund it themselves.

Plenty of losers

The reform will helpfully fill state coffers in 2017, when the government will still be striving to reduce the deficit. Employers and employees who have contracted out of the state second pension scheme are currently entitled to a discount on their national insurance contributions. That discount will disappear in five years’ time, pushing up the tax bills of both.

The extra cost may be the final nail in the coffin for final-salary schemes in the private sector, where employers are already struggling to cope with regulations, increased longevity and poor investment returns. At the very least, employers may ask workers to contribute more or suffer reduced benefits. In the public sector, where planned pension reforms have already caused much resentment among the trade unions, the government has promised that the new plan will not lead to further benefit cuts (although the workers will face a higher tax bill).

The government is also taking the opportunity to change the process of setting the retirement age. The life expectancy of the old has been improving at an accelerating pace. By 1990 those aged 65 could expect to live five years longer than their counterparts in 1920. By 2010 those aged 65 had added another five years to their lifespans. The state pension age is already set to increase from 65 to 66 in 2020 and to 67 by 2028. Further increases will be set as part of a five-year review process, under an independent panel, which will aim for consistency in the proportion of adult life spent in receipt of a pension. Towers Watson, the consulting actuary, calculates that, on current projections, the retirement age will increase to 68 in 2041 (five years earlier than planned) and to 70 by 2065.

This is painful but welcome. Simpler pension systems are better—and Britain’s could be made simpler still if the government took the opportunity to integrate the winter fuel allowance, which is paid to retired postmen and private-equity managers alike, into the new flat-rate payment. But, inevitably, the change will mean winners (self-employed workers are the clearest example) and losers—and the latter are likely to make the most noise. Current pensioners and those retiring before 2017 will have to settle for the current, less-generous, pension. They are likely to feel especially aggrieved. And they vote.