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The plight of the Waspi women is a dire warning to anyone who trusts future governments to fulfil their promises on pensions – or at least what many taxpayers would see as promises.
The financial pressure on governments to increase the pension age has been mounting for many years, as people live longer. The increase of the pensionable age for women from 60 to 65 and then to 66 has been particularly contentious, and the way these changes in the state pension age were communicated led to the foundation of Waspi – Women Against State Pension Inequality – in 2015.
But what has catapulted their protest into the headlines has been the support of the Parliamentary and Health Service Ombudsman, which has ruled in their favour on the increases not being properly communicated to affected women. It stated: “Our investigation found maladministration. This means an organisation doing something wrong, not acting properly or providing poor service.” Pretty blunt. So the ombudsman has called for compensation, which raises two immediate questions: who pays and how much?
The first is easy to answer: it can only be current and future taxpayers. The “how much?” is tricky. Estimates range up to £35bn, the amount sought by Waspi campaigners, whereas the recommendation of the ombudsman would cost somewhere between £3bn and £10bn. In any case, the Department for Work and Pensions has resisted committing to any payment, leading to the ombudsman calling for Parliament to intervene.
But behind this “how much?” issue is a wider one of principle. It is the extent to which any one government can make a commitment that will have to be honoured by its successors 50 or more years later, when economic conditions will inevitably be quite different.
This is particularly difficult in the case of public pensions, because they are founded on what is, I am afraid, a lie.
National insurance contributions are presented, implicitly at least, as people saving for their retirement, together with paying for other social services that they might need now and in the future. But they aren’t. There is no separate pot of funds into which the payments go. Instead, working people are putting money into the general pool of taxation, part of which is used to pay for the pensions of previous generations of workers. It is a transfer of wealth from young to old.
It is a system which has not worked too badly in the past because the number of pensioners relative to that of the working population has been reasonably stable: around 300 pensioners to every 1,000 workers since 1992. Though people have been living longer, the combination of growing population and more women in the workforce has held the ratio down.
However, the Office for National Statistics calculates that from 2030 onwards it will climb to around 367 by the 2040s. So to keep the ratio between workers and pensioners stable, according to the International Longevity Centre UK, the state pension age will have to rise further, to 70 or even 71, by 2040.
If governments were truly honest, they would be saying to people currently in their 20s and 30s that they should not expect to get their state pension until they were in their 70s. That is not a message that any politician would want to go into a general election saying – but of course they know that by the time this will happen they themselves will be long retired.
So what should happen? You can see this as a moral issue. Waspi is not against their pension age rising to equalise with men, but for some people this is quite clear cut. If a government makes a promise it should honour that commitment. If women 30 years ago were paying for their pension on the basis that they would receive it when they reached the age of 60, they have a right to get that pension at that age.
Others would argue with equal force that it cannot be right to expect young people now, struggling to buy a home and bring up a family, to have to pay yet more for the pensions of a lucky generation, who benefited from lower taxes and should have saved more for their retirement. After all, taxes as a proportion of GDP are heading to the highest level since 1948.
Intergenerational equity is a difficult moral issue, so it is probably more helpful to focus on the practical side of things. If there is to be a settlement on the lines that the ombudsman suggests, and the cost is in the £3bn region, maybe a little more, that would be fundable within the broader public finances. Governments cannot commit their successors and the electorate must accept that. But it would be a useful reminder to them that politicians must be straight with voters, explain what they are doing and why, and give people time to plan their futures.
However the message to everyone is surely that they should not base their financial decisions on what a government might or might not do 40 years in the future. We have no idea what the country will look like in 2064. Someone in their early career can have no idea what sort of jobs they will be doing, let alone when they think they might retire, or indeed whether they will actually be living here are all.
Ultimately we have to trust ourselves: to be sensible, to save money and invest that wisely for our own pensions – to hope that the place will be prudently governed, but work on the assumption that it quite possibly won’t.
Actually I think the public pension issue is manageable for the UK, though the triple lock will have to be modified, for three main reasons.
The first and most important is that we have a decent and growing private pension system, boosted by auto-enrolment. Huge damage was done to the defined benefit system by the combination of the Gordon Brown tax change in 1997, which, combined with regulations that forced the pension funds to switch to gilts, effectively killed it.
Hardly any defined benefit pension plans are open to new employees. This is a shame, though I can see a decent intellectual case for switching to defined contribution pensions because you do get out what you put in plus interest and capital growth, or at least should do. Under defined benefit, aka final salary schemes, your pension did depend on that final salary, fair for some but not for others. They also discouraged labour mobility, something that you really don’t want to do.
If, however, the present defined contribution pension system is supported and developed in another 30 years’ time, the burden on the state system could be much lower. There will be some people who will always need the state to step in, but the less the need for it to do so, the greater the resources available to improve public services more generally.
The second is that if done right, thanks to AI it should be possible to achieve huge increases in public-sector productivity. This has been most disappointing in recent years, with the OBR reporting that it remains five per cent below pre-pandemic levels. Worse, it is actually below the levels of 1997. It is very early stages, but AI is exactly the technology that should help administration, lifting a huge burden off over-worked staff.
And third, the demographic outlook for the UK is relatively positive, at least compared to other developed countries, thanks to higher-than-forecast immigration. Our problem is investing enough to house the growing population – but that is another story.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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