You’d never have guessed it from the recent election campaigns, but Britain has a major problem with its pensions.
It’s this: as the U.K. population ages, the state pensions of ever more retirees are having to be financed by ever fewer people in work. Hence the sensible plans to raise the pensionable age for both sexes to 66 in 2020 and 67 by 2028. Such ongoing reform is crucial, but now we’re no longer enjoying rapid leaps in life expectancy – the average life expectancy has almost stalled at just above 79 for men and just below 83 for women – the political parties seem increasingly disinclined to tackle the huge economic problems thrown up by demographic change. Surprise, surprise!
During the recent election, for example, Labour pledged the state pension age would never rise above 66, and also made an unfunded commitment of up to £58bn to “compensate” all those women who’d lost out in the recent equalisation between the sexes of the state pension age. The UK simply can’t afford such largesse. The bottom line is we’re living longer, and the retirement age is still too low. This is a problem that isn’t going away. (Oliver Kamm, The Times, Dec 2019).
It is also a problem faced by numerous governments (among economically advanced countries , anyway). The principle of a state pension is a decent, civilized idea, especially for those who have earned low incomes and have not had enough income to save for retirement. But in some ways it is over-generous. For instance, if you are a foreigner and marry an American citizen in mid- life you get social security payments (albeit very modest in size) even if you never had a job in the US. Surprising things like this suggest the need for a review of the system.
On the other hand, the idea of a state pension is something that offers peace of mind and some reassurance that you will not ( should not) be homeless and poverty- stricken. It is thus Epicurean in spirit and to be supported.
Part of the problem with Labour’s proposals is that the state pension is enormously poor value for money. A large proportion of your taxes go towards it, but the rate of return is relatively low.
Instead, the government should replace the state pension with compulsory private pensions. Everyone would have to contribute at least 5% of their earnings over say £15000 per year to at least one government-approved pension plan. Those without the means to do so would be able to claim Universal Credit when they retire. But the vast majority of people would benefit from a more generous retirement package, and the government balance sheet would improve from fewer pension liabilities.