The endlessly changing state pension

Radio four ran a 30 minute briefing on the state pension last Thursday which is well worth listening to. Paul Lewis and Paul Johnson are joined by Claer Barrett and Steve Webb.

Expertly chaired by David Aaronovitch, we learn that it’s been around since 1909 with major advances in 1948 and 2016. Today £5 or every £100 we earn goes on the state pension- which amounts to £144bn a year. With national insurance falling fast, the worry is that the national insurance “fund” won’t be able to meet future payments. About 20% of national insurance goes to the NHS but in accounting terms, you’d have thought that the 80% that does needs to be going up not down.

The idea that we can’t afford the state pension is belied by the fact that we spent less on state pensions last year than was put aside to pay benefits. The national insurance fund went up by £11bn last year.

That said, Johnson says that as a country we will paying 5% of national income above the 5% we already are – in only 20 years time. This is down to our “ageing society”.

The state pension , according to Paul Lewis’ research would cost £250,ooo to buy on the open market so it is a very valuable benefit indeed. It is not for nothing that it so dominates the retirement income pie-chart

Steve Webb and Claer Barrett take on the second half of the program.

Webb outlines the current thinking on state pensions. The state pension age is currently 66, goes up to 67 by 2028 and is due to increase to 68 by at latest 2046. This is relatively uncontentious, we get that we are living longer.

Not so, the changes to the woman’s state pension age, which the Parliamentary Ombudsman says were not properly communicated to women in the transition period.

Steve Webb, as always, is good on the political consequences of shifting the state pension age and eliminating the triple lock. Webb reminds us that the 2.5% floor on pension increases he introduced in 2010 was as a direct result of a 75p year on year pension increase under the previous inflation linked system.

Mutatis mutandis

Claer Barrett, raises a number of more radical ideas including means testing the state pension, equalising the pension gender gap and dealing with the larger issues of caring (which is a principal cause of the pension gender gap). Webb points out that the voluntary system of private pensions does not make for an easy means test. The one country that has a means tested pension , has mandatory contributions – Australia.

Claer makes the important point that pensions are part of pay  and queries why we pay so little attention to the pension promise being paid to us by our employer.

Will the state pension change?

“Governments need to plan for our futures and so do we”, concludes David Aaronovitch.

What the program did not discuss was the nuclear option of abolishing the state pension. We learn from a recent study that many  youngsters reckon that the state pension won’t be around for them

It is all too easy to succumb to this kind of pessimism. Most people 30 years ago would have described a company pension as something that paid a lifetime income based on final salary (or something like that). Today many younger people have accepted that won’t be the case and I suspect that they think of the state pension as equally vulnerable to being dismantled.

Mutatis Mutandis

This medieval Latin phrase means “with things changed that should be changed” and applies to the success of the state pension to last and prosper over 115 years

I suspect that the rise and fall of the corporate DB plan is as a result of a failure to keep it as flexible as the state pension age. Corporate DB pension plans have not adopted the change needed to keep them going.

Could we have flexible accrual rates in DB – no!

Could we change retirement dates for DB = no!

Could we change the rate of increases as the state pension does = no!

The great difference and the great strength of the state pension is its mutability, in can change to survive. This was the great failure of corporate DB pensions which petrified benefit payment from “best endeavours” to “regulated guarantees” in the last years of last century.

Hearing Johnson and Lewis, Barrett and Webb talk of our state pension, I got no sense that it is going anywhere. It will remain flexible to change and we will get the pension in years to come that our national productivity affords. The same goes for unfunded public pensions. In a very real sense, each generation gets the pension they deserve and adapts the pension to their needs.

Funnily enough, when I was in my thirties and forties I never thought I deserved a state pension – nor that I would need one. Today I feel I deserve mine and I need it!