By common consent , when Mel Stride said “now is not the time”, the DWP’s Secretary of State meant “to properly address the long-term cost of the State Pension”.

This blog explores why the state pension age will have to go on rising for most of us but how – for the deserving – an early state retirement age makes sense.

Getting to the meat and drink of GAD and Lucy Neville Rolfe’s analysis of the sustainability of the current state pension age we read;-

Alongside changes in life expectancy, the number of children people have on average is lower than seen historically and is also lower than at the time of the 2017 State Pension age Review. As a result of changes in total fertility rates and continued life expectancy improvements, there are projected to be 5 million more pensioners in the population by 2070 and just 1 million more of working-age.

The differences in the growth of the pensioner population and that of the working-age population has a demographic impact. There were 280 pensioners for every 1000 people of working age as of 2020. This will increase rapidly from the 2030s and will reach levels never seen before by 2070, where the ratio is projected to be 393 pensioners per 1,000 people of working age

This has real-world consequences for the UK economy

The Office for Budget Responsibilityin their 2022 fiscal risks and sustainability report estimate that the costs of State Pension will increase from 4.8% of Gross Domestic Product (GDP) in 2021-22 to 8.1% of GDP in 2071/72. That needs to be seen in the light of the significant change in the UK economy in recent times and the impact on the public finances of heightened global volatility. This has changed the medium-term context which will affect the long-run outlook of the public finances.

Steve Webb is right to pick up the most important take-away from the work commissioned  by the DWP in this review.  Referring to the 8.1% of GDP cost of the State Pension by 2071

 Baroness Neville-Rolfe suggests a cap on the share of national income going on pensions, and looks at a figure of 6 per cent. Her report says that if this principle was to be adopted, we would have to raise the state pension age to 69 by the late 2040s. On this basis, anyone born from 1979 onwards would have a pension age of at least 69.

If 6% is the right number – and the Government has not said it is – then a cap on GDP has profound implications for the SPA and indeed for the triple lock. Right now there is no talk of means-testing the State Pension so that those with workplace pensions get a reduced state pension (as happens in Australia). This idea has been floating around in the Government Actuary’s Department for some time, I think it currently a non-starter as in a voluntary savings system (auto-enrolment) , it is an incentive not to save.

There are two practical alternatives to raising the retirement age for all, one of which is to finesse the retirement age through basic underwriting. This could mean that you got an earlier retirement age for living in the wrong place ,working in the wrong job or being less well- educated.  This has been proposed by Ros Altmann and others (and is touched on by Steve Webb).

The other is to offer early access to the State Pension on a similar qualification system as already applies, probably with reduced pension payable, this is the solution proposed by Lucy Neville Rolfe

The reference to 45 years of National Insurance contributions is important. The 65 year old who has a 45 year old record would have been unlikely to have gone through higher education and more likely to have been what used to be called “working class”. If that phrase has any meaning, it is in the link between work and pensions which is deeply engrained in British culture. You need of course 35 years of State Pension (NI) credits to qualify for a full state pension.

The Rolfe recommendation has been picked up by commentators, including a young lady commentating on what she saw as yesterday’s  news on radio 5 at around 4.30 am this morning.

I suspect that rewarding the super-serving worker with early access to the state pension can be reckoned cost neutral through actuarial factors, but I hope that the factors will be set in favor of the few who qualify. There are workers and there are super-workers, the latter have had fewer advantages and have less likelihood of a longer life.

I think there is an even stronger argument for paying state pensions early on an ill-health, incapacity basis.

Importantly, the measure of qualification needs to be quantifiable and virtually impossible to game. We should also recognise that it needs to be offered not claimed. Offering early retirement on cost neutral terms and on un-reduced terms where there is reason to consider life expectancy seriously impaired, seems both fair and workable.