Public pensions are founded on a lie
Ultimately we have to trust ourselves to be sensible
The financial pressure on governments to increase the pension age has been mounting, as people live longer. The increase of the pensionable age for women from 60 to 65 and then to 66 has been particularly contentious, and the way these changes were communicated led to the foundation of Waspi – Women Against State Pension Inequality – in 2015.
But what has catapulted their protest into the headlines has been the support of the Parliamentary and Health Service Ombudsman, which has ruled in their favour on the changes not being properly communicated.
The ombudsman has called for compensation, which raises two immediate questions: who pays and how much?
It can only be current and future taxpayers who pay. “How much?” is tricky. Estimates range up to £35bn, the amount sought by Waspi campaigners, whereas the recommendation of the Ombudsman would cost somewhere between £3bn and £10bn. In any case, the Department for Work and Pensions (DWP) has resisted committing to any payment.
But behind this “how much?” issue is a wider one of principle.
It is the extent to which any one government can make a commitment that will have to be honoured by its successors 50 or more years later, when economic conditions will inevitably be quite different. This is particularly difficult in the case of public pensions, because they are founded on what is, I am afraid, a lie.
National insurance contributions are presented, implicitly at least, as people saving for their retirement, together with paying for other social services that they may need now and in the future. But they aren’t. There is no separate pot of funds into which the payments go.
Instead, working people are putting money into the general pool of taxation, part of which is used to pay for the pensions of previous generations of workers. It is a transfer of wealth from young to old.
It is a system that has not worked too badly in the past because the number of pensioners relative to that of the working population has been reasonably stable: around 300 pensioners to every 1,000 workers since 1992. Though people have been living longer, the combination of a growing population and more women in the workforce has held the ratio down.
But the Office for National Statistics calculates that from 2030 it will climb to about 367 by 2042. So to keep the ratio between workers and pensioners stable, according to the Longevity Centre UK, the state pension age will have to rise further, to 70 or even 71, by 2040.
If governments were honest, they would be saying to people in their twenties and thirties that they should not expect to get their state pension until they are in their seventies.
Waspi is not against their pension age rising to equal men’s, but for some people this is quite clear cut: if a government makes a promise it should honour that commitment. If women 30 years ago were paying for their pension on the basis that they would receive it when they reached the age of 60, they have a right to get that pension at that age.
Others would argue with equal force that it cannot be right to expect young people now, struggling to buy a home and bring up a family, to have to pay yet more for the pensions of a lucky generation, who benefitted from lower taxes and should have saved more for their retirement.
However, the message to everyone is surely that they should not base their financial decisions on what a government may or may not do 40 years in the future. We have no idea what the country will look like in 2064.
Ultimately we have to trust ourselves to be sensible, to save money and invest that wisely for our own pensions – to hope that the place will be prudently governed, but work on the assumption that it quite possibly won’t.