New data from the International Longevity Centre suggests that the UK’s state pension age must increase at a far greater rate than currently planned.
The state pension age will have to rise to 71 by 2050 in order to maintain its affordability, according to new research.
The International Longevity Centre (ILC) has published research showing that several countries, including the UK, are facing “widening demographic imbalances” that will heap pressure on government finances.
The UK is forecast to reach a dependency ratio of 50% by 2050, meaning there will be only one adult of working age for every retiree in receipt of the state pension.
The ILC’s change would represent a dramatic shift in government policy. Under current plans, the state pension age will rise from 66 to 67 for men and women between 2026 and 2028. A further increase to 68 is mooted for 2044 to 2046, but this is subject to an as yet unscheduled government review.
A worrying data picture
The ILC’s report is the latest piece of research to paint a worrying picture of the affordability of the state pension system. The Office for National Statistics reported in 2019 that, by 2050, “one in four people in the UK will be aged 65 years or over”.
The Institute for Fiscal Studies (IFS) published a report in December 2023 warning that the UK’s ageing population was putting “upwards pressure on both state pension spending and… public spending on health and social care”.
The IFS’ report highlighted several issues with the state pension system, including the uncertainty of income due to the ‘triple lock’. It called for several measures to bring more certainty for retirees, taxpayers and government.
A 2022 forecast from the Office for Budget Responsibility estimated that the overall cost of providing the state pension – under current plans relating to raising the state pension age – would increase from 4.8% of UK gross domestic product in 2021-22 to 8.1% in 2071-72.
Kate Smith, head of pensions at Aegon, said the ILC’s report would be “concerning for millions of people” who expect to rely on the state pension when they retire, adding that “certainty around the state pension is vital”.
Previous research by Aegon and H/Advisors Cicero found that 95% of UK adults expected to depend on the state pension in later life.
“Pushing back the state pension age to age 71 would be a shock for many – when they are expecting to receive this from age 67 or 68,” Smith said. “Some will only receive it for a short time, others not at all.
“This report, published in an election year, highlights the need for the political parties to detail their plans for state pensions ahead of the UK general election. This is too important an issue to be kicked into the long grass. People need to know where they stand and what this means for their later life, giving them plenty of time to adjust their working and savings plans.”
Reviewing the state pension age
A government-commissioned review into the state pension age, published in March 2023, recognised the demographic issues facing the UK. As well as a greater proportion of the population aged over 65, the UK fertility rate has also been falling, meaning that the future workforce is expected to shrink as a percentage of the overall population.
The review recommended that the government revisit the timing of the move from age 67 to 68 soon, emphasising that all options for changes should be considered.
However, some experts do not believe that raising the state pension age is the right answer to the demographic problem. Aegon’s Smith said the move was “a blunt instrument” that would “likely penalise those most in need”, as those with lower life expectancies may never receive a state pension.
A 2018 report by Christian Geppert and Hervé Boulhol, economists at the Organisation for Economic Co-Operation and Development (OECD), highlighted the significant problem posed by ageing populations but questioned whether state pension age changes alone would be enough to solve it.
Measures in place in 2018 across OECD countries implied an “average increase in the normal retirement age of 1.5 years by 2050”, Geppert and Boulhol found, but the demographic forecasts showed a rise of six to eight years was likely necessary to balance out the effect of ageing populations.
The authors highlighted productivity improvements and employment rates, particularly among older workers, would be “critical in ageing societies if we want to preserve the level of pensions”.