By Richard Johnstone | 12 April 2012
The International Monetary Fund has backed the UK government’s plans to link the state retirement age to increases in longevity, warning that the costs of an ageing population could ‘threaten the sustainability of the public finances’.
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In a report examining the impact of longevity increases worldwide, the IMF found that the costs of living longer could be much higher than has previously been forecast.
An analysis of the situation in the UK found that the difference between the money people have available for retirement and the amount needed could be as much as £1,381bn, 95% of the UK’s 2010 gross domestic product.
This is based on current longevity projections. Just a three-year improvement in life expectancy could increase costs by as much as 59%, the IMF said.
Because much of this cost would be borne by the public sector, governments around the world should acknowledge the existence of the longevity risk in their balance sheets as contingent liabilities and take steps to ensure sustainability.
As part of a ‘credible and realistic plan’ to do this, a ‘first [and] best policy’ would be to link the eligibility age for public pensions to life expectancy, the fund said.
In the UK Budget last month, Chancellor George Osborne revealed that ‘there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity’.
More details on how this will operate are due later this summer, alongside the Office for Budget Responsibility’s long-term fiscal sustainability report.
The Global Financial Stability Report also said that reducing benefits, such as the state pension, would be another way of controlling costs, but it admitted this would be ‘perhaps most difficult politically’.
The IMF urged the government to share risk with the private sector by promoting increased ‘financial buffers’ for individuals, including private retirement plans that take account of longevity increases.
The report concluded: ‘Longevity risk is already on the doorstep and effectively addressing it will become more difficult the longer remedial action is delayed.
‘Attention to population ageing is part of the set of reforms needed to rebuild confidence in the viability of sovereign balance sheets.’
