In her recent article on the state pension in the FT, Sarah O’Connor reminds us

“In the UK in 1917, King George V sent 24 congratulatory telegrams to citizens who had reached their 100th birthday. By the mid-1980s there were about 3,000 centenarians. In 2019, there were more than 13,000.”

 

But what if longevity isn’t rising for everyone? Data from England, which predate the coronavirus pandemic, show a nascent but troubling development.

While life expectancy has continued to rise in rich neighbourhoods and in the poor parts of affluent regions like London, it had started to fall since 2010 in the most deprived areas of poor regions like the North East

Should the state pension be underwritten?

Is it fair that we increase the state pension at the same rate for everyone? Should where you live determine when you get your pension.  Should the state pension like most purchased annuities, be underwritten?

These are ideas which are being openly discussed in the columns of the FT .  Baroness Ros Altmann, a former pensions minister, has called for an urgent rethink of the system, with new flexibility so that struggling groups can access their state pension early.

John Ralfe, an independent pension consultant, argues the system is fair already because more affluent workers pay more tax.

“The people with the highest likelihood of reaching 103 are the people who are paying in the most anyway.”

Since the publication of this blog, Ros Altmann has commented on more fundamental issues (for the full comment, scroll below this blog).

Latest ONS figures show the shocking reality that the least well-off women have healthy life expectancy little beyond age 50, whereas in the best-off groups women’s healthy life expectancy lasts till their early 70s.

That is fundamental (and similar disparities apply to men too, but this fact may explain the tendency of policymakers to assume that raising State Pension Age close to age 70 is a reasonable option.

On the basis of these ONS stats and the vast differential in private pension coverage (again with women worst off, as well as many women losing out in State Pensions too), it seems clear to me that a flexible band of starting age is much fairer than the current system.

At the moment, if you are healthy and wealthy enough to wait longer to start the pension, you can get more, but if you are not healthy or wealthy in your early 60s you get not a penny! Even if you have 40 or more years of NI contributions.

The argument that the current system is ‘fair’ does not stand up to scrutiny. Firstly, higher earners pay far less National Insurance as a percentage of salary because of the cut-off of the upper earnings limits.

Secondly, higher earners can receive more State Pension by delaying the start date. Thirdly, higher earners have much more chance to build up other pensions.

I believe it is vital to reconsider the idea that raising State Pension Age is a reasonable response to rising ‘average’ life expectancy. The vast differentials in both healthy life expectancy and average longevity, as well as the fact that 35 years is not a full working life for most people, suggests room for meaningful reforms.

I was disappointed that the recent review ruled out using a flexible band of pension ages that allows for ill-health and very long working life. Flexibiilty should work both ways, not just for the better off!

These arguments stretch beyond financial economics and even social equality. There are arguments that there is little labor for laborers  in their late sixties , partly because those who toil with their hands , lose physical capacity earlier and partly because they don’t want to work until they drop.

Al Rush is currently running  a poll on this aspect of the debate, responses have been sufficient to make it meaningful

If you have had a hard life in engineering, Armed Forces, road building, shipbuilding, mining, trawling, steelmaking etc, where there is reasonable evidence of reduced life expectancy, should you get access to a state pension earlier than someone who has (eg) sat in an office?

— Rush (@exRAF_Al) April 2, 2021

According to a large official survey of European workers, 72 per cent of high-skilled white-collar workers said they could do their current job at age 60, but only 44 per cent of lower-skilled manual workers. And that was all before the pandemic hit. It is likely the virus will worsen the health divide between rich and poor.

Although we still have a lot to learn about its long-term effects, we know that deprived communities had the highest infection rates, and that many of those admitted to hospital are struggling to make a full recovery

Those who rail against the cash stripping and high drawdown rates reported by the FCA in their retirement income market studies , should consider that many who have what are deemed “small pots”, see the proceeds of retirement saving as a windfall and as a bridging payment till the onset of the state pension.

Should small pots be used to bridge to the onset of the state pension?

A 55 year old today with a retirement pot of £30,000 has 12 years to wait for their state pension but could reasonably expect to pay themselves £250 per month from their retirement account without too much fear that the account would run dry at 67. I mention these figures as they approximate what’s in the pot for the average person by the time they get to 55. But of course the number is wrong for the poorest in society because so much employment has not been pensionable – especially if someone has been out of work, in self-employment or in work before auto-enrolment staged. The situation is particularly grim for women.

The grim truth is that there is rarely enough in the savings pot to reduce the burden of work, which brings into sharp perspective both the poverty of private pensions for the poorest and the value of the state pension, when it finally arrives.

Should there be early retirement options for the state pension?

This is where there are questions about the fairness of increasing the state pension age at the same pace for everyone.  A number of other countries have already opted to give pension benefits early to some groups. Portugal, France and Germany allow penalty-free early retirement for people who started work young and have had long working lives. Last year, Denmark decided to allow 61 -year-olds to retire one to three years earlier if they had spent more than 42 years in the labor market (which can include periods of unemployment).

I think there is an argument for allowing those who have most need of the state pension early – to have access to it early – with generous early retirement factors that recognize that the state will subsidize where it sees hardship. But this introduces an element of means-testing into the state pension which will be controversial. Whether the means testing is on medical grounds -(impaired annuity underwriting) , or linked to financial circumstances (becoming part of universal credit),  there is a strong argument for offering those in their sixties an early retirement option – based on need.

Fair shares for the state pension

There is no argument for offering people in good health with sound finances this option. People like me need to recognize we must work longer than we set out to do, or save a lot harder than we used to do or simply trim our expectations for retirement income.

My readers tend to be  the lucky ones who will benefit most from the state pension being a “wage for life”. We  should be innovating so that those with reduced means and impaired health get a just state pension.