Supercentenarians live to 110 or beyond, which coincides with the fact the UK State Pension was first paid 110 years ago. And the world’s first old-age social insurance programme started 130 years ago.
The German Empire’s chancellor, Otto von Bismarck, said that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the State”. This was debated in the Reichstag in the early 1880s and was eventually passed into law. The German system started in 1889, with mandatory participation and contributions from employees, employers and the government and set the state pension precedent for much of the developed world.
The German pension was initially only paid to citizens over the age of 70 and, of course, the majority received little or nothing, as survival rates to that age were low.
In the UK, the Old Age Pension was introduced in 1908, with the first pensions paid on 1 January 1909. The pension was also paid to people over the age of 70, with around half a million people qualifying.
In 1925, the pension age was reduced to 65, but a married couple’s rate was only paid when both spouses were aged 65 or more. This meant many men had to wait several years before getting the higher rate for their wives.
This issue was addressed in 1940 when the pension age for women reduced to age 60, a pension age that persisted until the Pension Act 2011, which accelerated plans to equalise the State Pension age (SPA), affecting around 2.6 million women to varying degrees and giving rise to the Women Against State Pension Inequality (WASPI) campaign.
So, having survived for well over a hundred years, where next for state pensions? That is the multi-billion-pound question.
The State Pension is by far the largest single item of welfare spending, making up 40 per cent of the total welfare spend and costing the State £92bn for 2016-17. To put this into perspective, approximately 30 years ago the cost was around £17bn.
To handle the increasing burden, the government has already planned rises to the SPA to 66, 67 and 68, and it will be reviewed every 6 years but could be amended in line with changes to life expectancy.
However, such changes are unlikely to be enough to make a significant difference. The Pension Policy Institute estimated in July 2018 there are currently just over 12 million people in the UK of state pension age or older, and project this number will rise to 13.6 million in 2030 and to just under 16.5 million people by 2050.
The Centre for Social Justice think tank recently recommended that the state pension be increased to 75 by 2035. This would certainly help the government coffers, but the suggestion was met with so much media and public uproar, it was dropped by the Department for Work and Pensions.
However, future governments may have to consider how pension payments are increased. Since 2010, the basic state pension, and now the new state pension, benefit from the so called ‘triple lock’ increasing by the higher of the Consumer Price Index, average earnings growth or 2.5 per cent. Many commentators believe it is unsustainable and, in April 2019 the House of Lords’ Intergenerational Fairness and Provision Committee recommended that ‘the triple lock should be removed and that state pension should be uprated in line with average earnings to ensure parity with working people.
Other options could be the creation of a sovereign wealth fund to start the move away from our pay-as-you-go system; a significant increase in tax and National Insurance; a reduction in the level of benefit payable; or more drastic increases to the SPA.
However, the state pension is the bedrock of many people’s income in retirement and future governments will make major changes to it at their peril.
There are other areas where savings the State could make savings.
For example, in the UK once someone reaches age 60, they can get free prescriptions and NHS sight tests. Over 60s in Wales, Scotland and Northern Ireland also get a free bus pass and Londoners can get the 60+ London Oyster photocard, which permits free travel on buses, tube, trams and London Overground. A young person struggling to pay off student debt or a couple desperately trying to get on the housing ladder could reasonably question why such benefits are being paid at a time when many of the recipients are still working.
There is also a National Insurance issue that could come under a future government’s spotlight. Currently, once an individual reaches SPA, they no longer pay National Insurance, even if they’re still working. So, someone over SPA and earning £35,000 per year would save £3,164 in National Insurance. With increasing numbers of people working past SPA, this could be a tax that a future government would want to reimpose.
None of this is easy, but future generations of workers won’t be able to afford to fund our pay-as-you-go pension system as they did in the past and this issue will need to be addressed. It won’t be popular or a vote winner, but the reality is the system that was invented 130 years ago is unlikely to survive another 130. In fact, will the State Pension survive another 30?