One of the great challenges of the 21st Century is how we look after an increasing aging population. We sometimes talk about a demographic time bomb, lower birth rates combined with increased life expectancy mean that the working population is smaller but has to support a much larger population of retired people.
We have seen two aspects to this. The first is that there has been a rising social care cost of providing accommodation and day to day care support for elderly people who need a level of looking after. Secondly, there’s been the question of how we sustain pension provision to a growing elderly population. The latter has also been exacerbated by different challenges affecting private pension funds as well. The result has been:
- That the State Pension age has been gradually increased from 60 for women and 65 for men to 68 for all.
- That it has become almost compulsory for employees and employers to participate in an additional pension scheme with a state-owned company, Nest being set up in 2008.
- That many people have been required to significantly increase their private pension contributions,
A further cost has been the Triple-Lock which all political parties have found it expedient to commit to. This means that State Pensions must increase by the highest of three figures each year: 2.5%, average wages or the inflation rate in September. With Inflation at over 10% in September 2022, that’s going to be quite a significant bill for many.
The State Pension is therefore one of the biggest parts of the UK’s Welfare Bill and an obvious target for those wanting to cut Government spending. So, unsurprisingly, we are beginning to see articles like this one in the Daily Telegraph.
Whilst I do not disagree that there are some serious challenges with the pensions bill, I am concerned about the kind of rhetoric in such articles because they paint pensioners as somehow dependent on the State with all the negative connotations that brings from certain political quarters. Pensioners become seen as an inconvenience and burden at best and “Welfare Scroungers” at best. That’s no way to be thinking about our parents and grandparents who have contributed so much to society and to our own lives over the years.
It’s also factually wrong. It’s worth checking back on history. A State Pension was first introduced in 1908 and this was universally available rather than being dependent upon contributions. In 1911, National Insurance was introduced as a compulsory health insurance scheme mimicking other countries like Germany. Over time, health provision was transferred to general taxation and National Insurance became responsible for other welfare needs. In 1946, a contributory State Pension was introduced based on personal contributions.
In previous forms, the State Pension allowed for a higher and lower rate dependent upon additional contributions but you could at one stage opt out of this and go with a private provider. I guess in some respects the Nest option now replaces this. If you do not meet all the pension contribution requirements, then you can top up your National Insurance contributions with voluntary payments.
Therefore, in significant respects, there’s little difference for the end recipient between the State Pension and a private pension. You contribute in to a scheme, knowing that what you will receive out of it is dependent upon your contributions. There is one key difference. With private pensions, you pay into a pot and the pension fundholder then invest it in order to generate enough provision to cover the cost of paying out pensions. With the State Pension, your contributions to NI today are being used to immediately pay pensioners at the moment. In effect, you act on trust that the next generation will pay in to support you when your time comes.
However, in many respects, the effect is the same. You have a covenant with the provider that if you contribute in, then your needs will be met. I would argue that it is then the responsibility of the provider to ensure that they steward the funds wisely. That the State provider has in effect acted like the third and foolish servant in the parable, doing little more than dig a hole and bury the talents we have lent them in the ground is not the fault of today’s pensioners.
We are increasingly seeing the term “intergenerational justice” used. It’s sometimes used to describe the way that future generations will be affected by climate change. It’s also being applied to the pension’s conversation. The idea is that today’s generation are having to pay in more to cover the gap. The implication is that the older generation are in debt to us.
I find the term deeply disturbing and sinister because it begins to imply that there is a particular demographic to be resented, blamed, envied. We should stay well clear of such moves whether it is an age group, class or ethnicity that are targeted.
But again, it’s simply not true is it? And that’s not just because as I’ve set out above, that pensioners paid in on the understanding that their contributions would enable their support. If the stewards of the funds failed to predict and plan for the future, then that isn’t the fault of the pensioners is it. However, it’s also not true because it misses some basic economic facts.
Yes, our generation, those in work now are having to put more in to cover our own pensions in the future, yes the bill being paid today is larger and yes that’s a factor of the demographic time bomb. However, that shift in demographics worked the other way too. We have benefited from a period of peace and prosperity that older generations worked for. My parents were able to provide much more, give much more to us as their children than theirs were able to coming out of the war years (and in my mum’s case in a family of 6 children to command mum and dad’s attention). The generation below mine has received even more.
There are some big questions ahead about whether the pension system in its current format is sustainable for the long term and particularly, immediately whether or not the triple lock should be kept in place. My personal preference would be a mechanism that looked at earnings and inflation over a longer period of time rather than the current lottery like system of taking the highest figure in one specific month. Longer term, we may need to look at moving more of the responsibility for pension provision onto Nest and the private providers.
However, the debate should be held in a way that doesn’t effectively scapegoat today’s pensioners. They are not benefit scroungers, they are not a burden. They are people who have contributed to our society and made the specific pension provision asked of them during their working life.
 The Pension Timeline – complete history of pensions (portafina.co.uk)
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