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The Actuary The magazine of the Institute & Faculty of Actuaries

W(h)ither the state pension age?

T he SIAS paper, written by Deborah Cooper, David Lewis, and Aidan Smith, aimed to provoke discussion of raising the state pension age (SPA) in the UK, without itself coming to a conclusion. It summarised the facts the ageing population, the declining cost of the state pension as a proportion of GDP (because of annual up-rating in line with prices rather than earnings), and the implication arising that the basic state pension would fall steadily in real terms. It also presented the arguments previously made for and against increasing the state pension age (SPA). It was very obvious that there were far more arguments for increasing the pension age than against, and indeed of the three arguments presented against raising the state pension age, two appeared to be contradictory.
The paper went on to present demographic evidence on increasing longevity, to explore whether extra years of life would be healthy years, and whether differences in longevity between parts of the UK would make increasing the SPA unfair. It also looked at the proportions of older people still working (again considering different areas separately), and the impact on the whole welfare budget benefits for those below and above SPA of any change. The paper discussed methods for managing an increase in state pension age, and also offered as an alternative the possibility of a more flexible SPA.
In starting the meeting, the chairman, Brian Ridsdale, noted that there had been 39 consultations on pensions under this government (at least according to David Willetts, the opposition pensions spokesman). Frequently, the authors of the current paper had been called on to formulate the profession’s response.

Demographic change
Aidan Smith introduced the paper on behalf of the authors. He described how it had grown out of a brainstorming session at the Ageing Population Group of the profession, but with many subsequent contributions. The demographic situation, he went on, showed that there would be little change over the next 50 or so years in numbers of children or those of working age, but big increases in numbers of pensioners. However, the projected fall in pensioner support ratio (population of working age to number of pensioners) from 2001 to 2051 was less severe than the actual fall over the period 1951 to 2001, over which period pensions had increased in real terms. This was reflected in the strong growth in total social security expenditure over the period. Currently, expenditure on disability benefits and housing benefit/council tax benefit are each as significant as either expenditure on SERPS (the earnings-related part of the UK state pension) or the minimum income guarantee for pensioners it is only in future that SERPS/the state second pension will become a very large item of spending. The debate on raising the state pension age is different in the UK from elsewhere in Europe in the UK it is about making possible an increase in the value of the state pension, whereas elsewhere it concerns the affordability of the whole system.

Purpose of the state pension
Some of the contributions from the floor addressed the issue of increasing the state pension age by considering the purpose of the state pension. Is it a minimum income in advanced old age or is its purpose to allow a period of leisured retirement the distinction between the UK Beveridgean system and the Bismarckian approach more common on the mainland of Europe? However, there could be arguments for increasing pension age in the face of increasing longevity in either case. Another key issue was the extent to which raising the state pension age would facilitate a simplification of the pension system (basically by permitting an increase in the value of the basic state pension and thereby eliminating the need for means-testing). A simpler state system could provide a firmer base for private and occupational pension provision (and, it was suggested, this alternative provision could allow earlier retirement for those who wished and could afford it). The state pension could then be seen as providing cover for the ‘long-tail’ of longevity risk at the end of life.
Other speakers addressed demographic and labour market issues. One theme was that future labour market conditions were unknown changes in the age structure of the potential labour force might make it much easier for older workers to find jobs in future. Would the health of older people permit them to work? Others echoed the call in the paper for more flexibility in retirement ages.

A suggestion
Indulgently, I will add that I think that the state pension age should be increased. The government has argued against this, and cited problems of longevity and health disparities among different parts of the country and social classes, and also problems of older workers finding work. However, the same government is taking steps to address these points. Therefore, why not announce an increase in state pension age (say from 65 to 70 to be phased in from 2025 to 2035) to be confirmed in 2010 if the policies to decrease health differences and to improve employment for older workers have been shown to have worked by then?