Philip Booth

We need to reform pensions – here are some ideas

The government is facing a fiscal crisis. In the face of that crisis David Cameron has promised to continue to raise pensions in real terms. The biggest item of welfare spending – it makes up around half – is therefore set to get bigger. Indeed, over the next 50 years, pensions spending will rise by £330 billion (in today’s prices) partly because of an ageing population, but also because of the coalition’s populism.

It’s likely that the only safety valve left in the system – raising the state pension age – will be used more and more by the government to balance the books. As the IEA’s latest research Income from Work – the Fourth Pillar of Income Provision in Old Age demonstrates, there is plenty of scope to raise the state pension age much faster than the government intends. Indeed, if the government kept the lid on pensions benefits, abolished the winter-fuel allowance and free bus passes and raised state pension age more quickly, it could easily achieve George Osborne’s proposed welfare savings and have money left over for meaningful tax cuts.

Over the last generation we have been living longer, living healthier and retiring much earlier. The employment rate among men aged 55-59 decreased from over 90 per cent to less than 70 per cent between 1968 and the end of the 1990s. Employment amongst those aged 60-64 fell from around 80 per cent to 50 per cent and for those aged 65-69 fell from 30 per cent to about 15 per cent.

We are retiring earlier and yet living longer. In 2006, a man aged 65 could expect to live for over four years longer than he could in 1981.

If things are bad here, they are much worse in continental Europe.

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