The Pensions Time-bomb

Pensions are a cornerstone of our welfare system, and something that despite the growing differences between the political parties in our country remains untouched – but with a quickly aging population and a growing spend on pensions, it’s an area that we desperately need to fix before it gets out of control.

The pensions system is a minefield both economically and politically, and there are many contradictions and dilemmas that need to be addressed before reaching any sort of conclusion on where to go next.

Pensioners need money to live and be able to enjoy their retirement, but with so many people now claiming a pension it is becoming unsustainable to pay out so much – so the question here is how to lower the outlay on pensions whilst making sure it still gives those of pension age enough to live on.

Politically too though it’s impossible to move very far on pensions, as while almost all parties will (or should) agree that something needs to be done, pensioners are the voters that are most likely to turnout at elections and they are naturally sensitive to any attempts to affect their means of income.  With a Conservative Government this is especially true, as their generally older support base is a key to their electoral success and any moves against them could end up backfiring and letting the Labour party back into power.

The current pension rate is set at £155.65 per week, and that figure subject to a ‘triple lock’ which means it is set to rise each year in line with inflation, average earnings or 2.5% – whichever is higher.  Protecting pensions is a smart move and one that makes a lot of political sense, but promising that the Government will spend the most amount of money possible on a major part of the welfare system every year without consideration is fiscally irresponsible.  It also seems to miss the main factor that affects a pension’s purchasing power and how much the money is worth to the people that get it, and that’s cost of living.  We’re currently paying out a sum that has no real basis in what a pensioner actually needs.

We also see a situation where there is a disconnect between what people pay in to the state pension fund via National Insurance and what they get out at the end.  This means that those born between 1956 and 1961 will end up receiving 118% more than what they paid in to their pension when inflation is taken in to account.

It is difficult to fix this problem, as a pension, and even a welfare, system will always end up in those working paying for those that are not working, but it is unfair that some are earning a pension that is almost 20% more than what they are entitled to.

This is where a more privatised pension system would help, as the money paid in would be individually accountable and could be more directly in line with people’s contributions.

People are living longer and that means that the original pension age of 65 is beginning to be out-of-date, as now those reaching 65 can now expect to live for another 20 years.  Compare this with the life expectancy when the pension was introduced in 1908, where you would receive a pension for reaching the age of 70 even though life expectancy was only 45 for men and 49 for women.  Even in the 50s, when the welfare state that we have at the moment was largely set up, pensions were then payable at 65 with life expectancy at 66 for men and 70 for women.

Of course though, people in their seventies shouldn’t be expected to have to work full-time if they don’t feel able to, but the truth is that we can no longer afford to keep the pension age so static when it means letting people live off Government payouts for as much as a quarter of their life.

But another difficult problem is that high energy prices are forcing more and more elderly people into making the impossible decision between paying their bills and affording basic things such as food.  No matter the cost of a pension system, no person in this country should need to go hungry because of inability to pay bills.  Pensioners should receive the same access to benefits as the rest of society, and this would mean that the state pension can act as it should – as a bonus to income for pensioners.

So at the moment pensions are increasing while more and more people are receiving them, but still many pensioners are left in a situation where what they’re given isn’t enough and they need to decide whether to heat or eat, which shouldn’t have to happen in 21st century Britain.

The pension system is failing us in many ways at the moment, but there’s things we can do:

What we can do about it

My recommendation is that we start treating pensions just like other benefits and make the basic protection a responsibility of the state but allow people to top up their pension funds privately.

There should always be a basic state pension that allows elderly people to live comfortably in their retirement, which should rise in line with cost of living as should the Living Wage for those that are working.  If cost of living should ever fall, the pension should too.

This pension should be means tested though so that those with significant savings or private pensions are not receiving money from the state that they do not need.  Private pensions should offset state pensions to a degree so that for every £3 over the annual state pension earned the state pension falls by £1 – keeping the incentive to build up a private pension but reducing the cost to the state.  In the same vein, if a pensioner has savings worth over double the state pension they are set to earn over the next three years then the pension should be reduced to reflect this, reaching zero for those with savings of over £50,000.

The pension age should continue to rise, striking a balance between the traditional retirement age of 65 and the life expectancy of the time so that elderly people aren’t working beyond their abilities to but the state isn’t responsible for paying people out of work entirely.

To help with this, those elderly people that do decide to continue working beyond retirement age should be incentivised with the personal allowance on the taxes earned being lowered to encourage them to continue building up a private pension that they can rely on when they decide to finish their careers.

We can have a pension system that gives pensioners enough to live well and enjoy their retirement whilst making sure it doesn’t break the Government’s finances.

Pensions need not be a time-bomb, we have the tools to defuse it.  We just need to get to work and start fixing it now.

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