The UK’s state pension crunch will hit in the 2020s

According to Gordon Dryden Gilling-Smith’s 1967 Guide to Pensions and Superannuation, the first recorded pensioner was someone called Martin Horsham. Horsham retired on 10 March 1684 on a pension of £40 a year.

That may not sound much today but, at that time, average yearly earnings in skilled trades were between £30 and £36 a year, while in unskilled trades and agriculture they were between £9 and £20. Horsham’s pension was paid to him by his successor in the workplace, a Mr G Scroope, from his own earnings of £80 a year.

Irrelevant to pensions today? Not really. The principle established – that of the pensions of those in retirement being funded by a levy on those at work, something we today refer to as a pay-as-you-go system – is the structure on which our state pension system and most other similar systems around the world are based.

That said, the state pension in the UK today is not so generous as to provide a pension of double average earnings. It will not make us anywhere near as wealthy as Horsham was relative to others when he retired all those centuries ago. The maximum state pension anyone can get nowadays is around 30 per cent of average earnings.

For pay-as-you-go state pension schemes to work across the generations as people join and leave the workforce they need to take account of the ever-changing demographic and economic realities. Clearly, if we were ever to have an increasing number of young taxpayers in the workforce and a relatively small number of people retiring then it could be expected we could afford to pay a generous level of state pension.

Equally, the worst outcome would be if we were to have a high number of people retiring at a time when we have a relatively low number of younger taxpayers. If that were to happen then you would expect lower state pension outcomes as a result.

State pension costs can only really be controlled in two ways. The amount paid can be varied or the length of time the pension is paid can be varied. Recent changes to the state pension in the UK have seen a popular higher pension promise but with an unpopular later attainment age at the same time: a neutral approach in my view. But what of the future following the likely economic and demographic uncertainties caused by last week’s vote to leave the EU?

The effects of that will begin to be felt during the 2020s as our terms for disengagement with the EU are finalised. The 2020s is also the decade when the UK’s so-called baby boomers reach retirement age. While the post-war baby boom in the US lasted through the 1950s, the same was not the case in the UK. Our post-war baby boom was over by the end of the 1940s. Our real baby boom happened in the 1960s.

Our pay-as-you-go state pension system in those soon-to-be days will need to react to the realities of a sharply increasing number of pensioners in light of the current demographic and economic landscape.

Source: Money Marketing written by Steve Bee 4th July 2016 1:15 pm

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