State PensionMay 12 2017

Labour’s state pension plan could cost £300bn

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Labour’s state pension plan could cost £300bn

A Labour general election promise to scrap the planned increases in state pension age beyond 66 could cost taxpayers nearly a third of a trillion pounds, according to Steve Webb, former pensions minister and director of policy at Royal London.

Commenting on the proposal which appeared in the Labour party's general election manifesto, Mr Webb said: "The cost of cancelling planned state pension age increases is astronomical.

"These are eye-watering sums of money which would either have to be found from somewhere or added to the national debt. As we live longer, it is inevitable that state pension ages will have to rise, as they are around the developed world. It is unrealistic to suppose that as a nation we can afford to ignore the fact that we are all living longer."

If the planned state pension age increases are to be scrapped under the Labour pension manifesto proposal: the planned increase from 66 to 67 due between 2026 and 2028 will not happen and the planned increase from 67 to 68 due between 2044 and 2046 will not happen.

The first of these changes will potentially affect everyone who reaches pension age between 2028 and 2046, who would receive the state pension at 66 instead of 67.

This would impact roughly 650,000 people a year over an 18 year period, so 11.7 million people in total.

Mr Webb calculated that if you assume each person misses out on a flat rate pension of £8,000 a year in today's money that multiplies up to £93.6bn.

The second of these changes could affect everyone who reaches pension age after 2046.

Considering just today's workers (i.e. those aged 18 or over), this could be all those aged 18 to 37. This would be 650,000 people per year over a 20-year period, or roughly 13 million people.

Each person would gain two years' worth of state pension or £16,000 each which would mean a total of £208bn.

This means, according to Mr Webb, the total cost of the proposed policy is just over £300bn – or nearly a third of a trillion pounds.

These calculations assume around 650,000 people reach state pension age in any given year.

Putting the numbers in context, Tom McPhail, pensions expert at Hargreaves Lansdown, said: “The state pension costs around £100bn a year and these projections roll out over the next 30 years, so we are talking about a total cost in today’s money of around £3 trillion; in other words these Labour proposals would increase the state pension costs by around 10 per cent.

"If you wanted to keep the changes cost neutral, you’d have to cut the state pension from £8,000 a year to around £7,200.”

Back in March, the government rejected a parliamentary petition calling for women to be granted early access to their state pension, claiming that working longer is beneficial to physical and mental health.

The request was also rejected on the grounds that it would harm the economy and would be actuarially complicated.

The comments were made after the petition gathered more than 10,000 signatures, the threshold at which the government is obliged to respond.

The petition was launched in mid-February by Waspi Voice, a splinter group led by founding members of the Women Against State Pension Inequality, or Waspi, campaign.

It called for early access to the state pension for women born in the 1950s who were caught by changes to the state pension age.

stephanie.hawthorne@ft.com