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The Actuary The magazine of the Institute & Faculty of Actuaries

Austerity cuts and retirement age changes falling short

The state pension age needs to be increased to 70 by 2046 and a further £20bn of spending cuts imposed in order to reduce UK public debt to pre-crisis levels, according to PwC.

In a paper published ahead of the Office for Budget Responsibility’s first detailed report on long-term UK fiscal sustainability, analysis by PwC revealed if current policies were maintained public debt would be 90% of GDP and rising by 2050 due to the costs of an ageing population.

Even if the UK state pension age were raised to 70 by 2046 - rather than 68 as currently planned - PwC claims that public debt would be projected to rise from the middle of the next decade to reach around 80% of GDP by 2050.

PwC chief economist John Hawksworth said: "The government has already taken steps to address this problem through reforms to public sector pensions and has started the process of raising the state pension age. But the bigger challenge relates to health and long-term care costs."

Last year the government announced it will accelerate the increase in state pension age to 66 for both men and women by 2020 and to 68 by 2046. PwC added that to bring public debt back down to just below 40% of GDP by 2050 - its 2007 level before the financial crisis - would require fiscal tightening of around 1.3% of GDP by 2020, equivalent to about £20bn at today’s GDP values.

The paper states the projected long-term squeeze on national finances has two primary causes: the one-off pressure and cost arising from the retirement of the post-war baby boom generation born between 1946 and the mid-1960s, which will have to be paid for by smaller numbers of working age people in later generations. And the ongoing trend for people to live longer, leading to a steady rise in age-related spending.

This means the ‘support ratio’ is steadily falling, the firm said. Today there are about 3.6 people in the UK of working age for every person above state pension age, but by 2050 this will have fallen to only around 2.4 people based on current plans.