The State Pension Age (SPA) should be raised faster and further than currently planned to fund higher state pensions, reduce public debt and reflect the population trend of longer, healthier lives according to a new PwC report, “Working longer, living better: A Fiscal and Social imperative”, published today.

While the government has already legislated for the State Pension Age (SPA) to rise from 65 in 2020 to 66 by 2026, 67 by 2036 and 68 by 2046, there is a fundamental question as to whether this goes far enough, particularly given the sharp rise in UK public debt due to the global financial crisis since this legislation was introduced in 2007.

The report argues an attractive option to offset part of the fiscal cost of an ageing population is to raise the SPA, which would both reduce state pension spending and boost tax revenues as some people choose to work longer as a result.  The report suggests that the government needs to implement a phased increase in the SPA to 70 by 2046, which would have an estimated net fiscal benefit relative to current plans of around 0.6% of GDP in 2046, or around £9 billion at 2010/11 GDP values.

The report estimates that this would be cover around 60% of the projected rise in state pension spending between 2010 and 2046, which is driven by the policy of re-indexing the basic state pension to earnings rather than prices before the end of the next parliament. A higher SPA would help to fund this more generous future state pension without adding further to the burden of public debt and taxation on younger generations of workers.

The net fiscal benefit from raising SPA to 70 (rather than 68) by 2046 would be equivalent, according to illustrative calculations in the report, to avoiding a tax rise at that time of just under 2p on the basic rate of income tax, or just under 2 percentage points on the standard rate of VAT.

The report also identifies a wider programme of change that requires government, employers and employees to embrace new approaches to the delivery of health, social care and adult skills. This would include scrapping the increasingly anachronistic Default Retirement Age for employees, although this change would need to be announced far enough in advance to allow employers to plan effectively for this change. 

John Hawksworth, head of macroeconomics at PwC and co-author of the report, commented:

“The sweet spot enjoyed by the economy during the past 30 years as the post-war baby boomers moved through the workforce has the potential to turn sour as longer periods of retirement leave a lasting and expensive burden on smaller future generations of workers. Either taxes will have to rise or other policies need to adjust to deal with the higher costs of state pensions, health and long-term care, as well as the large debt hangover from the global financial crisis.

“A phased increase in the state pension age is part of the solution and the government already has plans to increase this to 68 by 2046, but  we believe it needs to go further and faster with state pension age rising to 67 by 2030 and 70 by 2046.  The estimated net fiscal benefit of this policy of around £9 billion per annum at today’s values would cover the majority of the costs of a more generous earnings-indexed basic state pension. This would restrict greatly the spread of means-testing for future pensioners and avoid adding to the already large burdens of public debt and taxation on the children and grandchildren of the baby boomers.”

Jon Sibson, partner and head of PwC’s Government & Public Sector practice added:

“While the Government has responsibility for changing the SPA legislation they must also encourage a change in attitudes and behaviours among individuals and employers.  The Default Retirement Age should be abolished and public services and policies reshaped to promote extended working life.  There will also need to be policies focused on employment support and the right non-pension benefits.”

The report makes a number of additional recommendations concerning Government, employers, employee representative bodies and the financial services sector.

Chris Dobson, director in PwC’s Government & Public Sector practice and co-author of the report, said:

“A shift in approach from employers is needed to deal with the coming impact of the SPA changes.  Organisations across all sectors need to overcome barriers to flexible and later working so that the changes benefit both employer and worker.  The focus should include looking at the changing nature of job roles and career trends as the average age of employees increases.”

ENDS