The state pension in its current form is unsustainable, both fiscally and politically. I don’t think it should be scrapped but its inexorable upward increase has to be curbed. Over time, its value should drop back and means-tested post retirement welfare should take up the slack: less universal benefits, more targeted. Tom McPhail on Linked in
Tom McPhail
I’m not scaremongering. A means-tested state pension is inevitable
We need to aim our limited welfare budget at those who genuinely need it
Given the increasingly dire state of the economy, a means-tested state pension might now be inevitable.
I’ve argued before in these pages that a possible solution could involve increasing the state pension age to 75, and it’s fair to say this met with some resistance. But would means-testing it be a better alternative?
If you are minded to dismiss this speculation as mere scaremongering, consider the facts. In 1970 there were roughly five workers paying into the tax system for every retired person. Today the ratio is three to one and by 2070 it is expected to be two to one. The state pension costs about £150 billion a year, an increase of about 60 per cent in the past ten years, driven by the generous triple lock as well as the demands of a growing pensioner population.
The state pension already accounts for more than 40 per cent of our welfare budget, according to the Office for Budget Responsibility (OBR), and its cost is expected to rise further. The OBR predicts that spending on the state pension will rise from about 5 per cent of GDP today to 7.7 per cent by the early 2070s. This is not sustainable.
Many pensioners absolutely need and rely on their state pension. We can’t let them down. Pensioner poverty is still a problem, particularly for older, single pensioners.
Pensioner affluence is a thing too though. I have seen first-hand many pensioners who enjoy, but who also absolutely do not need, the £10,000 to £15,000 a year that they get from the state. Many of today’s pensioners own their own home and enjoyed the benefits of working lives building up guaranteed pensions through the latter part of the 20th century.
Wealth taxes have been espoused by some populist agitators, but before we go down that road, maybe we should simply ask why we hand out triple-locked welfare payments to those who don’t need it?
The triple lock has increased the state pension by the higher of inflation, wage growth or 2.5 per cent each year since 2012. And this increasing cost comes against a backdrop of stagnant per capita economic growth, which has averaged less than 1 per cent a year over the past 25 years.
There has been much discussion in the news recently about the usurious cost of student debt, with the government charging interest rates that would make a mafia loan shark blush. Those same graduates now face an uncertain job market and impossibly high house prices: in what reality does it seem fair to keep taxing them to pay for today’s pensioners?
Our national debt is fast approaching 100 per cent of our annual economic output. The cost of servicing that debt is now more than £100 billion a year. We spend more on debt interest than we do on education, more than we spend on transport and defence combined. In only a handful of years over the last few decades has the government actually managed to reduce our debt. The default setting is to borrow, borrow, and borrow more every year. This too is unsustainable. The imperative for economic growth and reduced public spending demands hard choices of our politicians.
And how could means-testing the state pension work? We already have pension credit, a means-tested top up for pensioners on low incomes, which only costs about £6 billion a year. It could be possible to dispense with the triple lock and deliberately allow the state pension to fall back in real terms, while at the same time significantly increasing the generosity of pension credit. This would target our limited welfare budget towards those who genuinely need it.
“I’m not scaremongering. A means-tested state pension is inevitable”
What does a “means-tested state pension” mean? He is arguing for a less generous state pension and more reliance on means-testing. Which would go against the grain of pension policy since 2016, and doesn’t seem inevitable at all. The logical extension of the “advice” to not rely on the state pension would be to tell low earners who only have access to AE minimum pension schemes to opt out of those and spend the money instead. But that would seem completely irresponsible.
If you think that higher earners do too well out of the state pension (though it is largely redistributive by design), it would be better to address that by taxing them more, rather than reducing incentives to save and increasing uncertainty for millions of workers.
We’ve been solving the pension crisis backwards.
Every proposed fix focuses on the retirement end of life — raising the pension age incrementally, squeezing slightly more years of work from people who are already tired. This is timid thinking dressed up as reform. It misses the profound opportunity that longer, healthier lives actually represent.
The real answer is to redesign life from the beginning, not the end.
The Three-Stage Life is Obsolete
We inherited a simple architecture: learn, earn, retire. It made sense when lives were shorter, bodies wore out faster, and knowledge changed slowly. None of those things are true anymore. We are applying a Victorian life structure to 21st century human beings who will routinely live to 100.
The pension funding crisis isn’t a funding problem. It’s an imagination problem.
What Changes When You Plan for 100 Years
If retirement at 65 made sense for a life of 75 years, we need to ask what makes sense for a life of 100. The answer isn’t simply “retire at 90.” It’s something far more interesting — a life with multiple chapters, where education, work, rest, reinvention and contribution weave together across eight decades of productive engagement.
People in their 70s and 80s, healthier and more capable than any previous generation at that age, shouldn’t be positioned as a burden to be funded. They represent an enormous reservoir of experience, wisdom and capacity that our current model simply abandons.
Extend Youth, Not Retirement
The counterintuitive insight at the heart of this is that we should be extending the productive years at the front and middle of life, not simply pushing retirement further back as though it were a punishment deferred.
This means longer and recurring periods of education — not just at 18, but at 35, at 52, at 67. It means careers that pause, pivot and reinvent rather than burn out in a single exhausting arc. It means social systems that reward contribution in its many forms rather than drawing a sharp and arbitrary line between “worker” and “pensioner.”
As both longevity and healthy life expectancy continue to improve, the number of genuinely productive years available to each person grows. The question is whether our institutions are designed to capture that potential or squander it.
The Opportunity We Keep Missing
Framed correctly, this isn’t a crisis at all. It is an extraordinary civilisational opportunity — the chance to redesign how human lives are structured in a way that is better for individuals, better for economies, and solves the pension funding problem not through austerity but through abundance.
The 100-year life, fully lived across multiple meaningful chapters, funds itself. We simply need the level of thinking equal to the moment.
“The state pension costs about £150 billion a year …”
National Insurance Contributions (NICs) in the UK are, however, a major revenue source, expected to raise approximately £168 billion to £172.5 billion in the 2024/25 tax year.
NI is forecast to rise to over £199 billion–£205 billion in 2025/26, representing roughly 16.7% of total government receipts.
NI was specifically designed to fund UK state pensions and other social security benefits. Introduced in 1911, and significantly expanded in 1948. It operates as a “pay-as-you-go” system where current contributions from employers and workers pay for the pensions of current retirees.
“We are all in the gutter, but some of us are looking at the stars.”
Oscar Wilde
Distributio of inome in retirement is a zero sum game. All the pensions industry focus on improving outcomes for the better off simply makes the proor poorer.
We all agree that the have /have not divide is obscene.
The pie needs to be divided more responsibly. However the pie can be bigger if we only change the three stage lockstep to reflect current reality