Prime minister Harold Macmillan went down in history with the phrase “you have never had it so good” about rising living standards. That saying could easily apply to the current generation of pensioners.
Since the financial crisis in 2008, the average income of pensioners has kept up very well with that of workers. Higher levels of home ownership, final salary schemes and the triple lock on the state pension have helped cushion the elderly against various crises of the past two decades.
That accumulated wealth, combined with the pension freedoms that started in April 2015, has given many retirees an enjoyable life.
How favourable the current circumstances are for them is explained in an excellent report by the Institute for Fiscal Studies (IFS). On 20 April it published the first part of a multi-year Pensions Review into the pensions tax system.
It is key to point out the improvement to pensioner incomes over a generation is based on averages so not all pensioners are doing well. There is still much inequality among retirees and workers.
Nonetheless the IFS makes clear there has been some remarkable progress in addressing pension poverty. As a group, pensioners are now less likely than average to be in relative income poverty, with a rate of 18% just before the pandemic, compared with 31% for families with children.
Figure 1. Real median household disposable income (£ per week, 2020–21 prices) and relative income poverty rates, after accounting for housing costs
Note: Incomes measured as net household equivalised incomes, deducting housing costs, and expressed in 2020–21 prices. Relative income poverty defined as income less than 60% of contemporary median income.
Source: Authors’ calculations using the Family Resources Survey, 1995–2020.
By contrast average pensioner incomes were around 70% of the average incomes of those below the state pension age during the 1960s, 1970s and 1980s.
And pensioner income poverty rates throughout this period were often extremely high, with relative poverty rates of pensioners often running above 35%.
Currently the state pension is £200 a week that is more than someone of working age surviving on benefits receives. In a podcast on the first report IFS director Paul Johnson said: “The minimum amount available for pensioners is at least twice the minimum amount you can get if you are just under pension age.”
The retirement outlook for workers is more uncertain and complicated. The fundamental issue is how risk is apportioned. Generous final salary schemes, the old State Earnings-Related Pension Scheme (SERPS) and compulsory annuitisation meant the individual was not responsible for their pensions.
The decline of all these things means the individual now is. Also, personal circumstances interact with macro-ones too. That makes it exceedingly difficult for policymakers to make the right calls.
According to the IFS demographic and other pressures mean that spending on state pensions and other benefits for pensioners is already projected to rise by £100bn a year by 2070.
There will be even greater increases in health and social care spending. If the state pension age is increased as legislated, the share of adults over the state pension age is projected to rise from 24% today to 27% in 2050 and 30% in 2070.
The most recent forecasts from the Office for Budget Responsibility (OBR) are for state spending on payments to pensioners to rise from 5.6% to 9.6% of national income over the next 50 years.
Governments control public spending on pensions by increasing the state pension age and the rate at which it rises. But there are nuances here. Delaying retirement is more difficult for people in poor health, have caring responsibilities and those who are made voluntarily redundant.
The IFS report says that among those in their late 60s, 35% of men and 40% of women are disabled. They have a longstanding health condition that has a substantial negative effect on their daily life.
These rates rise to 43% and 46% respectively for those with low levels of formal education.
Consequently, a higher state pension age also pushes up income poverty rates among those in their mid-60s, in part because the working-age benefit system is less generous than the support available for pensioners.
For example, the increase in state pension age from 65 to 66 led to a more than doubling of the income poverty rate for 65-year-olds.
Aside from the state pension there is the decline in home ownership leading to a low standard of living in retirement and greater reliance on housing benefit.
Increasing numbers approaching retirement live in more costly, insecure, private rented accommodation. At age 65, only 3–4% of those born in the 1930s and 1940s lived in private rented housing, compared with 6% for those born in the 1950s and with what looks likely to be 10% for those born in the 1960s.
Variances in home ownership and health in later life will extend to longevity as well. Currently, a man aged 66 is expected to live for a further 19 years, but 13% can expect to survive until age 95; the equivalent figures for 66-year-old women are 21 years with 20% making it to age 95.
There are risks of running out of private resources or of being so cautious as to end up suffering a needlessly frugal retirement.
Finally there is the issue of social care that successive governments have failed to address. The OBR projects state spending on health and social care to rise from 10.3% of national income in 2021 to 13.7% in 2051 and 17.5% in 2071.
Figure 12. OBR projections of spending on state pensions and other pensioner benefits, and on health and social care
Source: Table 4.9 of Office for Budget Responsibility (2022).
One silver lining off all this is that the IFS Pensions Review mentions the work done by the Pensions Commission in the early 2000s. It was chaired by Lord Adair Turner with two other commissioners – Sir John Hills and Baroness Jeannie Drake.
It made two recommendations that turned out very well: auto-enrolment and reform of the state pension. The state pension age rose and the earnings link for indexation was restored. Those ideas were embraced by all political parties.
One hopes that the IFS’s work will eventually make some inspired suggestions that are welcomed across the political spectrum. They must be to succeed and make us all better off in the long run.
At the end of the podcast Johnson said: “It is hard to see a future where we are not paying significantly more tax just to keep the welfare state as it is with pensions, health and social care unless we are willing to do something quite different.”
We are going to need tough-minded public conversations and make brave policy choices to answer these problems.
