An industry expert has expressed concerns the nationwide pensions bill will become “completely unaffordable” as life expentancy rises. Amid the worries, he said that without dramatic reforms, the state pension age might need to rise to 80. The UK state pension age will gradually rise from 66 to 67 between 2026 and 2028. A further increase to 68 is currently scheduled for 2046, but this date is widely expected to be brought forward, with a broader review of the pensions system already in progress.
But with the annual cost of the state pension rising and people living longer, pension bills also increase. The latest report from the Office for Budget Responsibility (OBR) suggested the cost could be £200bn a year by 2073. This means that either the triple lock – which raises the state pension by the highest of inflation, wage growth, or 2.5% – must be scrapped, or workers will need to pay significantly more into the system during their careers. Current projections suggest that the state pension could cost 7.7–8.4% of GDP by the 2070s.
Jack Carmichael, a pensions expert and actuary at Barnett Waddingham, told the Telegraph this that can’t be paid for under current circumstances, and might even be undershooting the reality by then, too.
He said: “A more cautious approach would be to assume a closing of the life expectancy gap between the individuals with the lowest and highest life expectancy. Under this alternative, the annual cost of the state pension would increase by around £8bn a year – four times higher than the OBR’s central projection.
“Keeping the cost at a similar proportion of GDP would then require a massive increase in the state pension age, potentially up to the dizzying heights of 80.
“Even if the central projection is correct and state pension spending hits 7.7% of GDP, the cost is still going to increase by almost half in today’s terms. That’s completely unaffordable. Employees are either going to have to contribute 50% more to the state pension or [the government is] going to have to change the system in some way.”
Other experts have warned that the pensions system might be bringing in less than it pays out in as little as ten years. This is why the government needs to act now despite the clear unpopularity of the step. Rachel Vahey, head of public policy at AJ Bell, said the latest state pension review might force the government to act.
She said: “State pension benefits are one of the single biggest expenses for the Treasury and account for more than 80% of the £175bn pensioner welfare bill. Without policy intervention, state pension costs are set to spiral to nearly 8% of GDP over the next 50 years based on the current trajectory, up from 5.2% today.
“One option is to raise the state pension age higher and faster than currently planned. Although the elephant in the room is that state pension age is just one lever government has to help manage the cost of the state pension – the other is reforming the triple lock.”