Conservative plans to raise the state pension age

06 Oct 2009, by Nigel Stanley in Pensions & Investment, Politics

There seems to be some confusion about Conservative plans to raise the state pension age to 66 in 2016. It is beginning to look like they forgot about women when formulating this proposal.

At present the state pension age is 65 for men and 60 for women. But for women it is set to go up one year, every two years until it hits 65. In 2016 it will be 63.

While there is a difference in state-pension ages, EU law requires there to be sex equality in social security (and many other issues.) This is why men get their bus pass at 60, even though they have five years to wait before becoming (state) pensioners.

It also means that 60 year old men are eligible for mean-tested state pension credit. This is how DirectGov describes guaranteed benefit:

Age 60 or over – Guarantee Credit If you are aged 60 or over and living in Great Britain you may be entitled to the Guarantee Credit. This guarantees a minimum income by topping up your weekly income to: £130 if you are single

£198.45 if you have a partner These amounts may be more if you are disabled, have caring responsibilities or certain housing costs, such as mortgage interest payments.

Raising mens’ state pension age to 66 would not save as much money as one might think if women can still retire at 63 (or 64 if it goes up a year as well.) 65 year old mean without a job would still be eligible for guarantee credit, including the amount they have lost from their state pension, as long as they pass the means test conditions.

The only way to stop this would be to increase the state pension age for women by three years. This is no doubt why this had become the subject of a review by the time Mr Cameron appeared on the Today programme this morning.

There is nothing wrong with reviews or commissions to look at complicated areas of policy. Lord Turner’s pensions review was widely admired. But this looks like one of those ducking the question into the long grass reviews.

This is not the only issue raised by the policy. Mr Cameron also said this morning that the policy would save £16 billion a year.

You have to be a bit careful working such savings out out. You cannot simply add up all the pension not paid out. If people work longer then they will also pay more tax in that extra year of work.

But if Steve Webb MP, the frighteningly knowledgeable Liberal Democrat Spokesperson on Work and Pensions, cannot get anywhere near this figure I don’t expect anyone else can make the numbers add up either.

Putting up the state pension age and getting people to work longer are popular policies with politicians – if not necessarily with their voters – because it looks like a pain free way to raise funds for better pensions.

But it’s more complicated than that. Pensions increased in this way spreads the same amount of money over fewer years. The result is that those who live the longest – generally the better-off with other pension income – lose least and those with the shortest life-spans lose the most. Left Foot Forward has dug out Government Actuary tables to show how life expectancy varies. For men:

Using ONS figures, life expectancy at 65 in Glasgow is 78.8 and in Kensington & Chelsea is 87.7 (a spread of 8.9 years compared to 12.9 years at birth). Raising the age to 66 therefore means that someone who is 65 today will lose 7.2% of their retirement in Glasgow City but just 4.4% in Kensington & Chelsea.

The next question is what effect raising the state pension age will have on the labour market.

There are more than 600,000 64 year olds in the UK today. It is not unreasonable to think the same number will be affected by an increase in the state pension age in 2016. One can imagine how some newspapers would treat the prospect of 600,000 extra people looking for a job in 2016 if they all happened to be Bulgarian.

But we do not belive in the lump of labour fallacy here at ToUChstone. There is not a finite number of jobs to go round and it is not the case that for every older worker who stays in work there will be one less job for a young person.

In any case increasing the state pension age is not be the same as increasing the retirement age. Some people retire earlier- with varying degress of choice – and others work past their pension age, some because they like their work and others because they need the money. But more have stopped working by state pension age than work beyond it. Increasing the state pension age may well not lead to very many extra people working longer.

Just over 400,000 out of the 600,000 64-year olds in the UK are economically inactive according to a Labour Force Survey run my colleague Paul Sellers did this afternoon. Many of these, of course, will be women claiming a state pension, so it makes more sense just to look at men. 161,000 out of 304,000 64-year olds are economically inactive (53%).

Fewer than one in three 64-year old men are employees (32.5%) and another 12.6 per cent are self-employed.

Looking in more detail at those without work we find that one in four 64-year old men say they are retired (24%) and one in six (17%) are long term sick. Just under two percent say they are unemployed (ILO definition of looking for work).

(The most recent figures available are for the start of 2008 – so this analysis is pre-recession.)

Increasing the state pension age will undoubtedly lead to some people working an extra year, but probably less than half. The rest will simply find that they are poorer during their 65th year.

If government wants to get people to work longer it will take more than changes to the state pension age.

UPDATE: George Osborne has made it clear that women will not face a state pension age of 66 until 2020:

The Government should announce an updated review of the state pension age, as recommended by Adair Turner’s Pension Commission. Given the state of the public finances and rapidly changing demographic projections, the review should consider whether the increase in the pension age from 65 to 66 should be brought forward from 2026, but starting no earlier than 2016 for men and 2020 for women.

Women will welcome this, but it immediately puts new pressure on the claimed savings. Many 65 year old men out of work in 2016 will be able to claim guaranteed credit to give them exactly the same income from the state as they will receive once they have turned 66. This will protect poorer men, which is positive, but reduces its impact on the deficit.