State pension age ‘should rise to 69’ to stop Treasury overspending

Jeremy Hunt - Toby Melville/Reuters
Jeremy Hunt - Toby Melville/Reuters

Anyone born after 1979 will have to wait until they are 69 to collect the state pension under proposals to stop the Treasury overspending.

The independent report on the state pension age by Baroness Lucy Neville-Rolfe, published on Thursday, recommended state pension spending should be capped at 6pc of gross domestic product.

It currently accounts for 4.8pc of GDP, but is forecast to rise to 8.1pc in just five decades.

A 6pc limit would mean that the state pension age would have to increase to 69 between 2046 and 2048, the report found.

Sir Steve Webb, a former pensions minister and now partner at the consultancy LCP, labelled the proposed move as “draconian” and said it would pave the way for a state pension age of over 70 for younger workers.

“This would mean a rapid increase in pension ages, including a rise to 69 before the end of the 2040s,” he said.

“This would be a draconian shift in policy which would be likely to mean today’s younger workers facing a pension age of 70 or above.”

Sir Steve added that the Government would have to choose between keeping its controversial triple lock policy or a rapidly rising state pension age.

Under the triple lock, the state pension increases every spring in line with the highest of the previous September’s inflation, wage growth or 2.5pc.

The upcoming 10.1pc rise, which will boost the state pension to £10,6000 per year, is expected to cost the Government an extra £11bn this year.

He said: “If the Government were to implement a cap at 6pc of national income, to afford the change we would have either a rapidly rising pension age or a less generous pension.

“But the report has outlined the 6pc cap purely in terms of a state pension age rise, without reference to the triple lock – I assume because we are 18 months out from a general election.”

The triple lock is a sensitive political issue for the Conservatives, as it benefits active older voters.

“If the Government really did try to stick at 6pc, when the projection would otherwise be 8pc, that is huge. They would have to introduce a pension age starting with a 7,” he added.

Liz Emerson, of the Intergenerational Foundation, a charity, said that the move would put further pressure on younger generations to fund a system that they would receive little benefit from.

“Current retirees will benefit from huge rises in their state pension, while pushing the bill onto younger people who once again have to work for longer, contribute more and receive less over their lifetimes,” she said.

Baroness Neville-Rolfe's independent report also recommended that the Government should explore an “early-access scheme” targeted at workers who have performed physically demanding roles over several years.

It recommended the scheme also include workers who joined the labour market straight after school instead of going to university, providing they have made national insurance contributions for at least 45 years.

The report suggested that workers could receive state pension payments early at a reduced rate, and could include workers aged 65 and above.

The state pension age is currently 66 and is in the process of rising to 67.

Ministers had been considering plans to accelerate the rise by around a decade to the mid-2030s, but these were scrapped on Thursday. The Work and Pensions Secretary Mel Stride told MPs the accelerated increase had been abandoned in light of a fall in life expectancy.

Mr Stride said that given the level of uncertainty around data on “life expectancy, labour markets and the public finances, and the significance of these decisions on the lives of millions of people”, the Government would carry out a further review into the state pension age within two years of the next parliament.

The Government said there was significant uncertainty around the implementation of the recommended 6pc cap, referencing forecasts of both the size of the economy and cost of state pension spending over the long term.

It said it recognised that such a cap, if met through state pension age rises, could lead to “a number of rises in state pension age, disproportionately impacting those with lower life expectancies”, adding that “these impacts should be considered more fully”.

A rise in the state pension age would likely deepen social inequality, thanks to regional variations in life expectancy.

The last increase in the state pension age disproportionately affected elderly workers in the poorest areas of Britain, according to the Institute for Fiscal Studies, a think tank.

When the state pension age increased from 65 to 66, one in seven 65-year-olds were pushed into income poverty as a result, the IFS found.

A higher state pension age could also widen regional inequality. Official data suggests that men and women in England at birth can expect to live around two years longer than those in Scotland.