Pensioner with a cup of tea. Photo: Andrew Bret Wallis

Four reasons why we have more than two choices on the State Pension

28 Feb 2017, by Tim Sharp in Pensions & Investment

Pensions can be a complex subject. So it is tempting to make the subject into a series of straightforward binary choices.

The latest effort in this direction is the publication of research from the Institute for Fiscal Studies for the Work and Pensions Select Committee.

This places the public policy choice as the population ages, as a trade-off between State Pension age, on the one hand, and the level of the State Pension, on the other.

Such a discussion is very topical as John Cridland’s State Pension age review is due to conclude its work in the coming weeks. Ministers will then decide what level the State Pension age should be after 2028.

The committee’s analysis makes a number of important points. In particular that there are stark inequalities in life span. Life expectancy at birth for men in the Parkhead West and Barrowfield area of Glasgow is just 62.5 years. In the centre of Blackpool it is just 67.5 years. This, the committee, concludes, means many will die without receiving a state pension.

It therefore suggests that if State Pension age is to rise less quickly than is expected, the only way to keep the State Pension “affordable” is to end the triple lock on the State Pension. In place since 2010, the lock ensures that the State Pension rises by at least 2.5 per cent. This is an attempt to rebuild its value after a massive real-terms fall since the 1980s.

But this binary choice pays insufficient attention to the consequences of such an approach. And risks giving a misleading sense of the policy options in front of us.

Women are more reliant on the State Pension than men. The State Pension will make up 42 per cent of women’s expected retirement incomes, compared to just 28 per cent for men. Compounding this issue, women are less likely to have built up full State Pension entitlements than men, making them more vulnerable to reductions in the real value of the State Pension. While many of those retiring today have good workplace pension provision, this will fall thanks to the near collapse in workplace pension provision in the private sector from the 1980s. This means younger workers will rely greatly on the State Pension in their later years. It is therefore particularly important for younger workers that the Triple Lock remains in place. We need to think about how to expand revenues going into the Exchequer, not just divvying up how it is spent. The tax take from employees has been tumbling as the quality of work has diminished. If we want a sustainable basis for State Pensions (and other benefits and services) then ensuring people are in decent, well-paid work is a key element. And finally, Governments make policy choices all the time, balancing different priorities. It is misleading to suggest that the only choice available on the State Pension is between raising the State Pension age and reducing the rate at which it is increased.