Each day we are publishing a blog on one of the policies from our Spending Plan. Click here to read the previous policy.
The government has recognised that the ageing population is leading to an affordability crisis for the state pension. The Pensions Act 2011 accelerated the increase in the state pension age and the effects on the exchequer will begin to be felt in 2016. By 2020, it will have risen to 66 for both men and women. The Pensions Act 2014 increased the age to 67, although this will not happen until 2028. While these reforms are a step in the right direction, they are inadequate.
Using estimates of monthly age cohorts by birth relating to people who will reach the state pension age under current rules up to 2020–21, we modelled how many new pension claims there would be each financial year. We then ran the same model assuming that the state pension age would be rising to 67 instead of 66. We multiplied the difference by Department for Work and Pensions forecasts of average state pension and pension credit payments to calculate an estimate of the difference.
We found that this would save around £2.2 billion in 2019–20. Fundamentally, it is difficult to defend why taxpayers should be told to fund decades-long retirements for healthy and fit people in their 60s at all, except for the fact that people have been promised state pension-funded retirements and made their plans accordingly, meaning there is an element of unfairness about removing that entitlement. Counteracting this, however, is the unfairness of telling taxpayers to pay for it, as an ever larger proportion of the population is aged over 65 and the average length of retirement gets longer.
The state pension age should be increased to 67 by 2020. It is beyond the scope of The Spending Plan to make recommendations for spending that will not have effect until after 2020–21. Nonetheless, policy-makers should not stop at 67, and they should not wait until 2026 before taking further action. The sooner such changes are announced, the more able those affected will be to adjust their plans if they would prefer to do so.