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Say goodbye to the State Pension?

Will your children and grandchildren be able to expect a State Pension of their own? Andrew Sheen investigates

In 2050, those born in the 1980s will be approaching 70. And if current trends continue, they might still be waiting to claim their State Pension – if one even exists by then. Here, we look at the prognosis for the State Pension and whether today’s 20- and 30-somethings will ever get to claim theirs.

The State Pension Age is only going one way – up. The State Pension Age is currently 65 for men and will reach 65 for women by November 2018, rising to 66 for both by 2020 and then 67 by 2028. It will then rise to 67 for both men and women by October 2028. The Government will review the State Pension Age every five years and make changes if deemed necessary, based on life expectancy and other factors, with the aim of people being able to spend about a third of their lives in retirement.

A state pension age of 70 or higher?

Line drawing of hourglass

Unless there’s a sudden reversal in the trend for people living longer, it’s widely estimated that the State Pension Age will reach 70 by the middle of the century, affecting those born in the late 70s or early 80s.  But according to PWC, a financial consultancy, following the same formula, those actually born in 2050 could see their State Pension Age as high as 84.

That is, of course, if there is still State Pension by this point – something that not everyone can agree on. A survey of MPs carried out in December 2014 by Now Pensions, a pension provider, found that one in six thinks there won’t be a State Pension by the mid 2040s or if there is, it will be worth much less than it is now.

And there is a very good chance that the State Pension simply will not be affordable by that time, requiring either cuts to the amount paid or its outright abolition.

Will the State Pension be affordable?

These measures may well be necessary, if public finances are any guide, according to Michael Johnson, a former banker and Research Fellow at the Centre for Policy Studies, a think tank, who has helped advise the Government’s Economic Competitiveness Policy Group. Johnson argues that the National Insurance Fund (the Fund), which nominally holds National Insurance Contributions, could run dry in the next few years and almost certainly by the 2030s.

Johnson’s research paper, which is quite technical and complex, states that according to the Government Actuary's Department's (GAD) own projections, the Fund is projected to be exhausted in 2035-36, even taking into account the changes to retirement ages between now and then.

“While Fund exhaustion may be of little economic significance (it is an accounting curio rather than a real fund), it will be a symbolic event, indicating that the new State Pension is unsustainable,” he notes. 

To control costs, Johnson suggests that a State Pension Age of 70 “seems inevitable, and perhaps on an accelerated basis”, while "the Treasury must surely be tempted to abandon the State Pension’s triple lock.”

“Sooner or later will we have to debate a fundamental question: 'in the long-term, is any meaningful State Pension financially viable?’”

Who will pay for it?

Today’s State Pension is paid from today’s tax under a system called Pay As You Go (PAYG) - there is no pot of cash set aside for decades to pay for ‘your’ State Pension. This matters. According to the Office for National Statistics (ONS), the cost of providing the State Pension and other retiree benefits is set to spiral over the next half century, from £94 billion in 2012-13 (when the figures were compiled) to £170 billion by 2032-33 and to £438 billion by 2062-63.

At the same time, thanks to the fact the population is getting older, there will be fewer people of working age to ‘pay’ for the older generations’ pensions. Government projections show that by 2050 there will be around 19 million over 65 years old – almost double the 10 million or so at the moment.

Figures from 21st Century Challenges, a research programme run by the Royal Geographical Society and Institute of British Geographers (RGS-IBG), show that the dependency ratio – the number of people of working age in relation to retirees – is set to fall from 4:1 at present to 2.5:1 by 2035 and 2:1 by 2050, while according to the ONS, by 2037 there will be 365 people of State Pension Age for every 1,000 people of working age.

How much might the State Pension be worth by 2050? From next year, the State Pension will rise to at least £151.25 a week [insert a link to NSP info]. The Government is committed to what it calls the ‘Triple Lock’, which ensures the State Pension rises by the higher of earnings, inflation or 2.5%.

How much might it be worth?

Assuming that it rises by an average of 2.5% a year over the next 35 years and inflation, which nibbles away at the value of money, averages the Bank of England’s target of 2% then the State Pension will have risen to £362.50. Except, in terms of what it would actually buy, it would only be worth the equivalent of £181.26 in today’s money.

It’s conceivable that rather than do away with the State Pension, the Government could cut it by freezing its value or making increases much less generous. If the Government were to take away the Triple Lock and not increase the State Pension at all between now and 2050, it would literally halve the value of the weekly pension, to £75.63 in real terms.

It is clear that the State Pension Age will inevitably rise ever higher as long as people keep living longer, and any State Pension almost certainly won’t be as generous as today’s (and many pensioners would argue that today’s isn’t that generous). The State Pension will become increasingly expensive to provide, from both the point of view of the level of expenditure and the burden it places on the workers of tomorrow.

The unfortunate conclusion is that for today’s 20- and 30-somethings, relying on the State Pension to fund their retirement might be a wish too far.

What do you think? Is the State Pension something that today’s younger workers will miss out on? Let us know below or head to the Forum

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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