An actuary friend of mine writes to me
If we adjust the State Pension Age ahead of time, then it depends on assumptions for future improvement – (as adjustments follow a formula).
And right now as you know and I assume your actuaries discuss, future improvements are very debatable.
My suspicion is that the growing number of older people (which will happen for sure whatever happens with future mortality) will inevitably lead to a reduction is average resources devoted to the elderly.
As we pay lower pensions, we will find future longevity less than currently produced by the models and prudent modellers.
Perhaps people who model are reluctant to change rather than prudent
This argument can be simplified. What my friend is saying that the less money is put aside to pay for the lifestyle and health needs of those growing old tomorrow, the shorter “our tomorrows” will be.
This position is pretty radical. But we are seeing radical things happening elsewhere. Paul Johnson and the IFS are showing that for the first time, there are generations of us coming through who will have saved less and accumulated less wealth on their own account than the generation that preceded them.
The link between financial security and the capacity to go on living is proven. It is fundamental to actuarial longevity assumptions and is to some extent the reason that DB schemes are a victim of their own success.
If you are in receipt of a pension, you are financially motivated to live longer, if you are spending out of capital, it’s CARPE DIEM. Pension Freedoms not only bring up front tax-revenues, they curb the capacity of people to fund late age – they are a killing mechanism.
Austerity up – longevity down.
What my friend is hinting at, is that it is in the interests of those who are running this country’s finances, to impose austerity on us in retirement, to keep longevity down. His final point is that this is not actuarial prudence at work, but a deliberate exploitation of actuarial conservatism to beat the actuaries at their own game.
John Cridland based his recommendations on data published by the Office of National Statistics in 2015. The data will have been collected well before 2015.
Latest actuarial projections use more recent data and suggest that there has been a noticeable reduction in the speed at which longevity is increasing. Commentators are now directly linking this slow-down to the austerity measures in place to combat the economic problems created by the financial crash (now nearly 10 years ago).
The Labour party response to the decision to increase SPA for 6m of us is to call it “an unwelcome extension of austerity”. No doubt Philip Hammond could counter this by pointing to Greece where no curbs were placed on state pension promises leading to the disasters that have occurred to current living standards.
The only alternative I can see to the impact of austerity on old age is a sea-change in pension policy and an end to the current system of reverse redistribution.
At the moment the vast majority of pension wealth is held by a small proportion of pensioners and those saving for retirement. This has a lot to do with the distribution of incomes but the inequality is enhanced by an unfair regressive taxation system that distributes the vast majority of tax relief on pension saving to those who have most to save (and most saved).
I am not in favour of tinkering with pension taxes (as might happen with further changes to the lifetime and annual allowance. Figures in the FT show that for all the noise the Lifetime Allowance is yielding negligible revenues.
The cost of pension contribution tax relief is measured in billions – not millions.
What the Government appears to be doing, which appears to me unfair, is to subsidise the retirement of the wealthy, through a free tax-ride on pension saving; at the same time they are imposing ever greater restrictions on the payment of the state pension (as witnessed by the implementation of John Cridland’s recommendations this week.
My friend is pointing out that by ignoring signs that austerity is already reducing life expectancy and using actuarial modelling from another time, the Government is recklessly taking away a year of retirement from those 6m people who are already facing a substantial drop in retirement income (relative to current pensioners).
Nasty, brutish and short
The Cridland report talk of “longevity” and “healthy longevity” independently. The truth is that we are heading for greater inequality in retirement living standards between the haves and the “have-nots”. The haves have healthy longevity and the have-nots don’t.
This Government, by refusing to reform private pension tax relief is forced to reduce state pensions. This is grossly unfair to those on low incomes and ensures that a high proportion of them will be consigned to what we could call “unhealthy longevity”. The non-actuarial term is a life “nasty, brutish and short”.
That phrase has been knocking around a couple of centuries. When it was coined life expectancy in some parts of this country was under 30 years so its application today is relative. Government intervention has ensured that none of us in Britain live life in the state of nature,
However, in intent, the continued policy of “pension austerity” pursued by this Government can be seen as part of an inglorious tradition in this country of ensuring that the poor remain living shorter lives than the rich.
That is not something as a nation which we should be proud of – or should tolerate.
Strong words Henry, likely to inflame if read by those who do not understand what is going on. There is a more fundamental problem, it is not that the government is trying to widen the gap between the “haves” and the “have-nots”. It is that the “have-nots” do not have the resources to put aside to become “haves”.
State pension ages will continue to be adjusted upwards as the only mechanism government have in keeping state pensions at an acceptable %age of GDP. Either GDP has to grow faster or more younger people will have to pay more tax to pay for existing state pension promises.
Therefore the UK’s pension system needs to encourage all including the Have-nots to put aside top up retirement savings.
In previous consultation responses I have suggested changing the tax rebate system as many others have done to a flat rate for all, but whether Steve Webb would like a 33% credit, or George Osborne a 20% credit, x % of nothing is nothing, My radical suggestion was that the estimated given tax relief over a parliament should be converted into a flat rate lump sum, for every working person. It would be individually identified, as in a NEST account, but not accessible until retirement, and delivered as a pension. roughly if Treasury estimate tax relief costs £30bn, and there are 30m workers, it equates to a pension contribution of £1000 pa for every worker. Once set the amount should change yearly in line with changes in GDP up or down, thus every one would see a dividend from UK plc.
The Fund “NEST 2” could be a sovereign wealth fund, with ability to build UK infrastructure projects etc etc.
Needs a lot of refining, but would give everyone an interest in ensuring the UK works for everyone.