This generation is enjoying longer lives and longer periods of retirement than any of its predecessors. It's a result of improved standards of living, medical advances and other factors and is clearly very good news in many ways. But these big changes also create a number of significant challenges, especially to the government’s fiscal position through higher costs of state pensions, health and long-term care. This challenge is compounded in the UK (and other advanced economies) by the retirement of the baby-boom generation during the next two decades.
Given that public debt is already heading towards very high levels due to the effects of the recession, and that demographic changes are long-term in nature, the only way to deal with this challenge is through some combination of higher tax revenue and lower public spending. Extending working lives is potentially a very attractive way to deliver both of these: If people work for longer, then the government’s coffers could benefit from more revenue and less spending on pensioner benefits.
A higher State Pension Age (SPA) is part of the solution and this has been accepted by government, which subsequently legislated to increase SPA gradually to 68 by 2046. This will directly reduce net pension spending. To the extent that a higher SPA stimulates working, it will also boost tax revenues. The question now is whether there is a case beyond this, by raising SPA further and faster and through a wider programme of measures to support extended working lives.
I believe the government needs to implement a phased increase in the SPA to 70 by 2046, which would have an estimated net fiscal benefit relative to current plans of around 0.6% of GDP in 2046, or around £9bn at 2010/11 GDP values. This would cover around 60% of the projected rise in state pension spending between 2010 and 2046, which is driven by the policy of re-indexing the basic state pension to earnings rather than prices before the end of the next parliament. A higher SPA would help fund this more generous future state pension without adding further to the burden of public debt and taxation on younger generations of workers.
Raising the SPA on its own will, however, not be enough. A wider programme of change is needed which embraces new approaches to the delivery of health, social care and adult skills. This would include scrapping the increasingly anachronistic Default Retirement Age for employees, although this change would need to be announced far enough in advance to allow employers to plan effectively for this change. A shift in approach from employers is also needed to deal with the coming impact of the SPA changes. Organisations across all sectors need to overcome barriers to flexible and later working so that the changes benefit both employer and worker. The focus should include looking at the changing nature of job roles and career trends as the average age of employees increases.
Jon Sibson is government & public sector leader at PricewaterhouseCoopers LLP
