The state pension age needs to rise a lot faster than currently planned and should hit 70 by 2040 for it to be fair and fiscally sustainable, a think tank has warned.
The International Longevity Centre (ILC) warned the government’s state pension bill, which is currently £100bn per year, would grow significantly unless the minimum age is increased sooner than expected.
The total cost has tripled since 2000, the think tank said, arguing raising the SPA faster would help to “ensure fiscal sustainability, support intergenerational fairness and keep up with increases in life expectancy”.
Currently, the state pension age is 66 and two further increases are already set out in legislation, including a gradual rise to 67 for those born on or after April 1960; and a gradual rise to 68 between 2044 and 2046 for those born on or after April 1977.
But the ILC has used four different methods of setting the SPA between now and 2045 to see how much it should rise by and when.
These include having the same number of years in retirement as previous generations, keeping the ratio of people in work to those at or above SPA constant, spending a third of adult life in retirement and linking SPA increases to improvements in life expectancy.
All except one of the scenarios found the government’s plans were not quick enough.
For example, when looking at life expectancy it found that in 2021, 85.5 per cent of the population born in 1956 survived to the SPA of age 66.
When assumed that the same life expectancy rate would continue in future years, the ILC found the corresponding SPA would be age 67 in 2026, age 68 in 2032, age 69 in 2036 and age 70 in 2042.
SPA by calendar year based on constant probability of survival
Les Mayhew, head of global research at ILC, believes the state pension age will need to continue to rise.
He said: “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’.”
He added: “The impact of Covid on life expectancy needs to be considered in this data, 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.”
In December, the government launched a review of the state pension age to see whether the way it manages the cost is fair to taxpayers and pensioners., with findings set to be published in May 2023.
As part of this, the Department for Work and Pensions will also consider whether it should bring forward the rise of the age at which people become eligible for the state pension to 2037-39.