On New Year’s Day 1909, more than half a million people aged 70 and more, who had worked all their lives, had passed a means test and were of good character queued up at their Post Offices for an old age pension of five shillings a week (25p) – around 20 in today’s money.
The pension paid more than a century later is very different. Today nearly 13 million people – men over the age of 65 and women currently over the age of 64 – receive the state pension. A full one is around 160 a week (8,300 a year) and one in seven pensioners – close on two million people – survive on nothing else.
It costs more than 100bn a year but those costs will rise in the coming decades. The Office for National Statistics projects that the cost will double to 200bn by the mid-2030s and and double again to 400bn in the 2050s.
The reason is simple, according to Michael Johnson, a research fellow at the think tank the Centre for Policy Studies.
“From 1940 to 2010 the state pension age didn’t move at all. In 1940 it was 60 for women, 65 for men, as it was in 2010,” he says.
“But life expectancy over that 70-year period had increased by around 17 years, so we are faced with a fundamental problem that this is something we should have addressed a very long time ago and didn’t and therefore to address it now makes it much, much more challenging.”
Although the state pension is hard to live on alone, to buy an equivalent index-linked income from an insurance company would cost more than 250,000. Investment platform Hargreaves Lansdown estimates that to save that much would require 300 a month for 40 years.
Can we afford to give all workers a pension that generous?
The European Union collates the data on pension spending. On that measure, in 2020, the UK will spend 7.4% of its national income, or GDP, on state pensions. That puts us 25th out of 28 members, well below the average 11.2% of their GDP.
France, in the middle of the table, has compulsory pensions that replace 56.8% of earnings for someone on average pay. It will spend 14.6% of GDP on them, double what the UK spends. Internationally, we are misers not spendthrifts.
Things look a bit better for the UK in another OECD table which counts all pensions, including occupational and personal ones too. Then we come 22nd out of 34 for those lucky enough to have a pension through their job.
Auto-enrolment is now extending pensions at work to millions more. It counts as a compulsory pension so that will push us a few rungs up the first OECD table but not many.
Ms Queisser says: “We’ve looked at what would happen if the UK had the auto-enrolment scheme as a mandatory scheme, and then indeed the UK would move up to 22nd or 23rd.”
Michael Johnson is unimpressed by the international comparisons. He believes we cannot afford the state pension. GDP estimates, he says, are uncertain and countries that spend more than the UK may not be able to do so for long.
He points out that the National Insurance contributions paid into the National Insurance fund are not always sufficient to cover the cost of paying out pensions. As a result, in 2014-15, a Treasury grant of 4.6bn was required to plug the gap, so what was going out was larger than what was coming in. The following year, 2015-16, that grant had risen to 9.6bn.
He also believes a fixed pension age is an unfair lottery. Some would draw a pension for 10 years, others for 30, but all pay the same National Insurance contributions.
As an example, he says, imagine two 65-year-old men, one living in Chelsea in west London and the other living in Tottenham Green in north London.
“The life expectancy of the 65-year-old Chelsea man is around about 88. For Tottenham Green man it is about 71.
“So Chelsea man will enjoy the state pension for about 22 years and Tottenham Green man will enjoy it for approximately five. That seems extremely unjust to me.”
The growing cost of the state pension – albeit low by international standards – has led some to suggest that it should be means-tested once more.
This could be done either by limiting it to those with an income below the current limit to get means-tested help under the present system, or by taking it away from those who are better off – perhaps aligning it with Child Benefit which is progressively taken away from parents with an income above 50,000 a year.
Read more: http://www.bbc.co.uk/news/business-40826562