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State pension: age-old problems State pension: age-old problems
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When David Lloyd George introduced the first state pension, 105 years ago next month, it was worth around 25p a week and could be claimed at the age of 70. At the time, life expectancy was barely 50 and only one person in four made it to pensionable age. But it laid the foundations of a system that slowly began to reflect the real-life experiences of the working population. The value of the pension gradually rose, while pensionable age fell – to 65 for men and, a little later, 60 for women. By 1945, the average woman could expect a few years of retirement and – before too long – even the average man could expect a year or two.When David Lloyd George introduced the first state pension, 105 years ago next month, it was worth around 25p a week and could be claimed at the age of 70. At the time, life expectancy was barely 50 and only one person in four made it to pensionable age. But it laid the foundations of a system that slowly began to reflect the real-life experiences of the working population. The value of the pension gradually rose, while pensionable age fell – to 65 for men and, a little later, 60 for women. By 1945, the average woman could expect a few years of retirement and – before too long – even the average man could expect a year or two.
Here the cornerstones of the pension settlement remained, through generations of reforms that promised a whole extra tier of earnings-related top-ups, which never had the chance to mature. By the late 1970s, a mood of welfare expansionism had given way to fiscal retrenchment. And yet, while there was much penny-pinching round the edges, it was not until 1995 that any rise in the pension age was announced, and even then it was only for women and was not fully effective for a quarter of a century. It has taken steep rises in life expectancy to force successive governments to do more. The subsequent record of repeated setbacks shows just how tough that can be.Here the cornerstones of the pension settlement remained, through generations of reforms that promised a whole extra tier of earnings-related top-ups, which never had the chance to mature. By the late 1970s, a mood of welfare expansionism had given way to fiscal retrenchment. And yet, while there was much penny-pinching round the edges, it was not until 1995 that any rise in the pension age was announced, and even then it was only for women and was not fully effective for a quarter of a century. It has taken steep rises in life expectancy to force successive governments to do more. The subsequent record of repeated setbacks shows just how tough that can be.
The coalition's original intention was to bring forward, to 2016 for men and 2020 for women, Labour's planned rise in the pensionable age to 66. This would fit with the timetable for equalisation. That was scotched by EU requirements not to introduce new discriminatory treatment. The next plan was to accelerate equalisation, so that the pension age for both men and women could rise a little more quickly. But this plan meant half a million people would have to wait an extra year to retire, and some women an unanticipated extra two years. Protests forced another rethink, producing a cap on the length of time women would have to wait. Meanwhile, the chancellor started consulting on how to transition the pension age up again, first to 67 and then to 68. The first increase will be phased in from 2026, a whole eight years earlier than originally planned.The coalition's original intention was to bring forward, to 2016 for men and 2020 for women, Labour's planned rise in the pensionable age to 66. This would fit with the timetable for equalisation. That was scotched by EU requirements not to introduce new discriminatory treatment. The next plan was to accelerate equalisation, so that the pension age for both men and women could rise a little more quickly. But this plan meant half a million people would have to wait an extra year to retire, and some women an unanticipated extra two years. Protests forced another rethink, producing a cap on the length of time women would have to wait. Meanwhile, the chancellor started consulting on how to transition the pension age up again, first to 67 and then to 68. The first increase will be phased in from 2026, a whole eight years earlier than originally planned.
So no wonder the chancellor has devised a plan to escape from this conundrum of the incompatibility of politics and long-term pension plans. An automatic linkage between life expectancy and retirement – based on an expected period in retirement of a third of life expectancy – is so obvious it suddenly feels extraordinary that it hasn't been introduced before. At the moment it would imply a pension age of around 68 in about 20 years' time, and around 70 about 50 years from now. That means people starting work today can expect to put in a half-century at the metaphorical coal face. People just turning 50 shouldn't expect a state pension for another 18 years. Even so, all this deals with only one part of the problem. So no wonder the chancellor has devised a plan to escape from this conundrum of the incompatibility of politics and long-term pension plans. An automatic linkage between life expectancy and retirement – based on the idea that people should expect to spend up to a third of their adult life in retirement – is so obvious it suddenly feels extraordinary that it hasn't been introduced before. At the moment it would imply a pension age of around 68 in about 20 years' time, and around 70 about 50 years from now. That means people starting work today can expect to put in a half-century at the metaphorical coal face. People just turning 50 shouldn't expect a state pension for another 18 years. Even so, all this deals with only one part of the problem.
Earlier this week, official figures showed that while median incomes in working households had fallen a massive 6.4% since 2008, retirees have done pretty nicely, thank you, pocketing a 5.1% increase. Their incomes have been boosted by a lucky mix of circumstance – private pensions more generous than their children will have, a boost to state benefits, and rising employment rates.Earlier this week, official figures showed that while median incomes in working households had fallen a massive 6.4% since 2008, retirees have done pretty nicely, thank you, pocketing a 5.1% increase. Their incomes have been boosted by a lucky mix of circumstance – private pensions more generous than their children will have, a boost to state benefits, and rising employment rates.
The latest changes would mean, the Treasury says, savings of more than £400bn, in reduced pension spending and extra tax from longer working. That will allow the government to make two guarantees: pensions that rise in line with the higher of earnings or inflation, and a decent rate for the new, simplified single-tier pension. But it also means that those who aren't fit enough to work in their late 60s will be marooned on increasingly tight benefits, while poorer groups with below-average life expectancy can expect, unfairly, fewer years on a pension. The reform does nothing to promote equity between today's have-it-all pensioners and their successors, two generations away. It will be acceptable only if these problems are tackled – and if the Treasury can be held to its twin promises.The latest changes would mean, the Treasury says, savings of more than £400bn, in reduced pension spending and extra tax from longer working. That will allow the government to make two guarantees: pensions that rise in line with the higher of earnings or inflation, and a decent rate for the new, simplified single-tier pension. But it also means that those who aren't fit enough to work in their late 60s will be marooned on increasingly tight benefits, while poorer groups with below-average life expectancy can expect, unfairly, fewer years on a pension. The reform does nothing to promote equity between today's have-it-all pensioners and their successors, two generations away. It will be acceptable only if these problems are tackled – and if the Treasury can be held to its twin promises.
• This article was amended on 5 December 2013. The earlier version referred to an automatic linkage between life expectancy and retirement based on an expected period in retirement of a third of life expectancy.
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