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A quick fix won’t defuse pension time bomb

A quick fix won’t defuse pension time bomb

The rush of governments to deal with the pension time bomb by taking actions such as raising the pension retirement age is understandable in the current scenario, but given time to reflect industry experts are starting to see the unintended consequences which make such a simplistic approach self-defeating.

As I discussed in a previous post, there will be a big issue for society around the raising of the pension age as, without a net increase in jobs, the net effect is to transfer public support from those in their sixties to those in their twenties. There is definitely a need to consider this more carefully.  For example, retired people are far more likely to contribute to society by voluntary work than younger people, thereby giving at least some bang per buck for the tax spend.

There is also the added advantage that a retired pensioner couple is extremely unlikely to increase their family size, while the incidence of extra-marital births on sink estates all across Europe shows the way in which many of the young unemployed choose to occupy their time.  The fact that these ‘families’ usually lean on the state very heavily in terms of social problems as well as basic needs will mean that society could end up paying a very heavy price for not getting the younger generation into the workforce as early as possible.

Another unintended consequence is that the government will be increasing the lack of fairness within society.  As pointed out by the UK think tank, the Pensions Policy Institute, those on lower incomes have a lower life expectancy than those on the higher end, ensuring that they will lose most from the changes.

They also pointed out that to reduce the proportion of adult life spent drawing the state pension in the UK back to 1981 levels, (in 1981 25% of an adult’s life was spent drawing a state pension compared to 33% today), the state pension age would need to be raised to 72 within the next two decades.  This may be alright for the middle-classes but it would be almost impossible for those doing the lower-paid manual work, many of whom would not be physically able to keep working for that long.  The result could be that a lot of lower income workers spend the final three or four years of their working life on disability benefits, hardly the desired outcome of the changes and definitely not the way to reduce overall government spending.

This is to ignore the effect on those already in work situations, with promotions blocked and ambition stunted by the ongoing presence in firms of the older workers who would normally have retired.

It’s clear that the simple solution of increasing the state pension age will have ramifications far beyond the reduction of pension costs.  Without considering it as part of a more comprehensive package, governments are in danger of shifting the problem from one part of their expenditure to another, i.e. from the pension budget to the social services budget.

However, passing the ticking parcel around the cabinet table is not going to stop it from exploding. And when it does, the taxpayer will end up having to clean up the mess yet again.

A long term problem like pensions requires strategic thinking covering the whole area of government support for non-working members of society.  Sadly, there’s no way to defuse this time-bomb quickly.

Tom Murray

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