In response to the current State Pension Age (SPA) review, the International Longevity Centre-UK (ILC) argues that SPA may need to rise faster than planned – to ensure fiscal sustainability, support intergenerational fairness and keep up with increases in life expectancy.

Last month, the Government announced plans for the next SPA review. The current plan is to increase SPA from age 66 to age 67 between 2026 and 2028, and to age 68 between 2044 and 2046. However, the last review in 2017 proposed bringing forward these plans, so that state pension eligibility would go up to 68 between 2037 and 2039.

Currently, the state pension costs the Government over £100bn a year and has increased 3-fold since 2000. ILC, the UK’s specialist think tank on the impact of longevity on society, argues that any increase in the SPA could stop this cost from inflating even further, but to varying levels depending on how it is calculated. Using life expectancy based on year of birth and the latest population projections, ILC has compared the timetabling and costs of four different methods of setting SPA between now and 2045:

1. Having the same number of years in retirement as previous generations: Ensuring that future generations have the same number of years (currently at an average of 22.5 years) in retirement as previous generations, would mean SPA increasing to 68 by 2041, 2-4 years earlier than currently planned – saving the Government between 5-6% than current plans after 2037.
2. Keeping the ratio of people in work to those at or above SPA constant, therefore supporting fiscal balance between taxpayers and pensioners, would deliver significantly faster rises in SPA than current plans, rising to age 68 by 2031, age 69 by 2034 and age 70 by 2040. It would also help deliver significant savings after 2030, rising to around 16% by 2040.
3. Spending a third of adult life in retirement: A previously advocated policy of maintaining the proportion of adult life spent in retirement at one-third would deliver the slowest increases in SPA, which would only reach age 67 in 2040 and cost more than current government plans, especially between 2027 and 2033 when it would be 6% or 7% more expensive.
4. Linking SPA increases to improvements in life expectancy: Maintaining the current proportion of the population living up to and beyond pensionable age (85.5%) would require SPA to reach age 68 by 2032, age 69 by 2038 and age 70 by 2042. This method would be about 6% cheaper than current plans after 2030 with savings of between 12% and 16% from 2035.

All except one of the scenarios in the ILC’s briefing suggest the SPA may need to rise faster than expected, to ensure fiscal sustainability, support intergenerational fairness and keep up with increases in life expectancy.

Commenting on the findings, Prof Les Mayhew, Head of Global Research at ILC and Professor of Statistics at Bayes Business School, argued:

“Deciding state pension age is not a trivial matter. The decisions made in the latest review will impact on the incomes of everybody, whether that be via pension benefits or taxes.

Frankly, we’re probably going to have to increase SPA further between 2030 and 2045 for it to be intergenerationally fair and fiscally sustainable. It’s not a question of ‘if’ but ‘when’ and ‘by how much’. The impact of COVID on life expectancy needs to be factored in but the trends are fairly well set in stone.

However, the Government will need to assure that any plans for increases do not unduly exacerbate existing income inequalities without some form of remediation. Those who are unable to work for health reasons may well need additional help.”

Download the report here

Watch a recording of our webinar on the SPA here 

About the State Pension Age

The State Pension is a regular payment made by the state to people of or above SPA (currently 66 years) for the 97% of people who meet the qualifying criteria. The basic state pension will rise to £141.85 a week in 2022/23 while the new state pension, which is payable to people reaching state pension age after 6 April 2016, will be £185.15.

Official data show the state pension, including other state benefits, accounts for about 57% of gross income for a single pensioner and 37% for pensioner couples. Income from work-related pensions accounts for 27% of income for singe pensioners and 32% for couples. Income from earnings only accounts for on 6% of a single pensioner’s income, although this figure is much higher among the newly retired.

It is widely acknowledged that the state pension is not enough to live on, but a significant proportion of pensioners depend on it as their main source of income. For example, it accounts for 90% of income among the bottom fifth in the income distribution of single pensioners compared with 30% in the top fifth. Means-tested benefits in the form of pension credit is available to the poorest pensioners and help with housing costs.