Pay later
Reducing benefits is never popular, but in common with several other developed countries the UK has raised the state pension age and has more increases planned. The current proposal is that the state pension age be linked to average life expectancy with the result that roughly a third (32 per cent) of the average life will be supported. Life expectancy in the UK continues to increase so any starting point will need to be reviewable to reflect actual trends and ensure costs do not spiral out of control.
Pay out less
A third of developed countries have reduced the benefits paid from their state pension. In contrast the UK government introduced the new state pension, which was an attempt to direct benefits towards those who need it most. The flat rate of income means that in the long term those on lower income should do better under the new state pension, while higher earners will get less than they would have done.
Extending this approach to its logical conclusion might suggest reintroducing means testing of this benefit as in 1909.
One of the reasons the state pension is so expensive to deliver is that everyone who has paid national insurance will get it, regardless of whether they really need it. The chances of this happening will depend on the governments we have over the next 10 to 20 years.
Ideologically, a socialist government is more likely to advocate means testing, following the argument that it will allow them to pay more to those who need it.
Unfortunately means testing would mean that people could never really be certain that they will receive the state pension until they are old enough to qualify for it, and it is unlikely that they will be excused from paying NICs in the meantime.
The easiest solution for a Conservative regime would be to remove the current triple-lock that guarantees increases of the state pension in payment. The current government commitment to keep the triple-lock for the remainder of this parliament has led many people to conclude that it will not continue much beyond that point.
An element of inflation-proofing is required, since we already know that retirees become increasingly dependent on the state pension as they get older. In a low inflation environment, however, the 2.5 per cent floor begins to look less reasonable, particularly to the younger workers who are paying for it.
