Here’s the problem. In 1948 the average 65-year-old could expect to live 13.5 years.
People retiring now can expect to live much longer – 22.8 years.
If the trend continues as expected, today’s young people can expect to live into their early nineties.
Imagine the amount of money you spend on a pension is a pot of jam. Either you spread it far more thinly in future over more years – meaning a lower annual pension – or you are going to need a much bigger pot.
Is it fair to ask tomorrow’s taxpayers – the children of today and those yet to be born – to pay ever higher taxes to afford that?
That underlying problem is acknowledged by all sides. The question is not whether you cut state pension entitlements but how far you go.
If you are 38 or younger you were out of luck in any case. Plans already on the statute book mean you won’t be able to draw your state pension until the age of 68.
The people affected by today’s announcement are those born between 6 April 1970 and 5 April 1978 (inclusive) – between the ages of 39 and 47. Before today, they could have expected to retire by the age of 67. After today, they’ll have to wait longer to draw their state pension.
For some – probably the older ones born in 1970, it might be a mere few months longer. The vast majority have to work until 68.
Just to be clear what that means: you can expect to draw (in today’s money) £6,359.60 less from your state pension entitlements than you would have done had this cut not been made.
Hard done by
The government has said it expects to save £74bn pounds over the years up until 2046. The converse is that it is removing £74bn pounds from six million people aged 39 to 46 who otherwise could have expected to receive it.
Whereas it might be fair to lift a hefty potential tax burden from future taxpayers – our children and grandchildren – the middle-aged may nevertheless feel a little hard done by.
The Institute for Fiscal Studies pointed out today that the incomes of today’s pensioners are substantially higher than they were 10 years ago – higher than they have ever been – whereas the average earnings of younger generations have stagnated in real terms.
You are much more likely to be in absolute poverty if you are a child in a working household with one earner than you are if you are a pensioner.
Yet the burden of austerity has fallen on those of working age – who are likely to see their household incomes drop again in the coming years because the government is cutting working-age benefits.
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Meanwhile pensioners collect universal benefits regardless of income like free TV licenses, winter fuel payments and free bus passes.
Now take a look at occupational pensions.
Millions of today’s pensioners started collecting them at the age of 60 and received a guaranteed benefit, indexed to inflation, based on a proportion of their final salary. But among the middle aged and the young, far fewer will receive a guaranteed amount. Instead they simply save – and the benefits rise or fall with the stock market and are highly likely to stay flat throughout retirement – so they gradually get poorer.
Until recently the indexing of benefits to earnings meant inequality – the gap between the top tenth and the bottom tenth – shrank. But generational inequality – the difference between young and old – has been getting starker and starker. And that’s before you even start talking about house prices.
Before you howl at your middle-aged misfortune and get cross about how your grandma drew a pension aged 60, it’s worth counting a blessing. This whole problem is caused by the fact that we can expect to live longer.
So while those aged 39 to 46 will wait a year longer to receive the state pension, they will on average live to collect it at least a year longer.
The best way to prevent yourself losing out is to stay as healthy as possible, thereby forcing your children and grandchildren to cough up taxes to pay for your state pension for the maximum possible time.