The UK population has experienced a major transformation within its age structure, the average age is increasing, as a result of improved healthcare and people having fewer children (Roberts, 2019). It can be seen on figure 1, it represents historic and projected period life expectancy in the UK. According to the Government Office of Science (2016), the life expectancy will increase by around 5 years by 2035.
The current state pension age is 65 for men and women and it is to increase to 67 by 2028 (Hill, 2019). This article will focus on the impact of ageing population, as well as, the idea of increasing the State Pension Age to 75 by 2035, which has been proposed by the Centre of Social Justice (CSJ) in August 2019.
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Many elderly people in the UK live in the severe poverty
There have been a significant increase in the number of elderly people living in a severe poverty in the UK, the percentages have risen from 0.9% in 1986 to 5% in 2019. It has been one of the largest increases in European countries . The UK’s basic pension is extremely low, the full amount of the new State Pension is currently £168.60 a week.
Individuals personal finances
Due to the high poverty among retired people and the increasing life expectancy, it is important that we start planning our retirement now. One way to prevent poverty for pensioners is financial planning, as people who retire can’t only rely on the state pension. As a reason of living longer, people will spend more money in the duration of their retirement, therefore they will need to save more. Reviewing our current pension pot is vital to identify the pension we will get in the future. People can increase their saving for retirement by increasing pension contributions, investing spare money or even reducing current spending.
The advantages and disadvantages of employing people beyond current SPA
Working beyond the State Pension Age have many advantages and disadvantages for individuals, employers and also the state, many of the benefits are non-financial, containing health and wellbeing (Roberts, 2019).
The vital benefit for elderly people, which continue working past the SPA, is decreased possibility of serious health problems, for example heart attack or cancer by around 50% compared to people who retired at the SPA . According to Di Gessa et al. (2016), staying in work for only one year beyond the retirement age is related with a 9% to 11% lower risk of dying, regardless of health. Additionally, due to the technological improvements, there are more jobs than the average 75 year old will physically be able to perform .
On the other hand, working for longer can be disadvantageous for health and wellbeing for older workers. Around 50% of people over 50 suffer from a minimum of one long-term health condition. Specific types of jobs are able to develop health problems, examples would be long shifts, which can lead to insomnia or fatigue. Another example would be people that are exposed to stress over a long period of time throughout their employment, these people might suffer from damage to their short or long term-memory. Data show that it is more likely for elderly people to continue in the work force as long as they are in satisfactory condition employment, in which the stress level is low. Additionally, the employer should support elderly employees through flexible working hours and training.
Issues raised by an ageing workforce
As a reason of the aging population, the spending on Pension State by government increases as well. The state pension is the main welfare spending, accounted for 42% of overall spending in 2018. The pension bill has increased from £17bn in 1989 to £92bn in 2019, and it is expected to rise by about £20bn by 2023 as a consequence of aging population.
Hundreds of thousands of people aged over 50 are consider “economically inactive”, one of the reason for it is due to the age discrimination. Contrarily, the government states that the number of people over 50 years old in work is at a record of over 10.6 million. The Centre for Aging better report (2018), states that around 11% of individuals aged 50+ in the UK have suffered from some sort of discrimination in terms of age while at work or while applying for jobs.
There is also a fiscal impact affecting the UK government due to the aging population in terms of increased spending on the welfare (state pension) with the combination of the reduction in the working population. The Old Age Dependency Ratio the is the number of people ‘economically inactive’ to the people of working age. The rise of OADR will cause difficulty with the long-term fiscal sustainability in the UK, the ratio is expected to rise from its current 28.2 to 48 by 2050. The UK’ fiscal balance should be adjusted if the public services are expected to function correctly alongside the benefit continuing in the future. Therefore, the SPA should reflect more accurately on the longer life expectations and increasing the SPA to 75 by 2035 will be used to keep the OADR in between 20 and 25, which will improve the UK’s expected fiscal position.
How will it affect Public Services
One of the most affected public service by ageing population will be NHS, as a reason of the increase in the expense of looking after elderly people (Boseley, 2017). Due to the rising number of ageing people the demand for Health and Care system will change, and the NHS will need to adapt to these changes. The rise in demand will cause an increase in the expenditure on the care services. It might lead to requiring payments from people for treatments or even simple examinations.
The fairness of raising State Pension Age over such a short period of time
The proposal to raise the State Pension Age to 75 would unquestionably save money for the government as a reason of reducing the spending on benefits and also boosting the UK’s Gross Domestic Product (Ryan, 2019). On the other hand, increasing the SPA so rapidly would cause many issues for retirees as they wouldn’t have enough time to prepare (Lewis, 2019). They will face serious financial difficulties if they do not save enough money to cover the period between leaving the employment and applying for a state pension (Ryan, 2019).
Factors beyond retirement planning that raising SPA to 75 might impact
It is expected that people work two-third of their lives and enjoy their retirement for reminding one third. The current life expectancy is 80.96 years, therefore the proposal of increasing the SPA to 75 would leave people with around 6 years of retirement before death. In addition, the life expectancy can vary across regions in the UK even by 15 years. For example, the life expectancy in Liverpool is 76.1, meaning that people would only receive the State Pension for around a year, despite making the National Insurance payments and paying income tax for decades.
Views of the professional bodies on this issue.
The possible alternative to the proposal
We can distinguish two models that shape the pension system, Bismarckian and Beveridgean. The Beveridgean model is used in the UK, which means that the state provides the minimum support for pensioners, in addition, people are encouraged to save money into private pension if they wish to continue a satisfactory standard of living in their retirement (Soares, 2012). In countries where the Bismarckian model is adopted people pay higher taxes, also the welfare state system is more supportive for the pensioners (Soares, 2012). The alternative proposal would be to mix both systems. For example, increasing the income tax, would result in the government spending more on the State Pension.
Together with people living longer, the spending on the State benefits by the government is rising as well, leaving less money for the State Pension. Therefore, contribution to private pension by employees has never been more important. There have been many actions undertaken by the government, as a result of the ageing population. One of the example is the introduction of the auto-enrolment into a workplace pension. The reason why the government introduced it is because not enough people save a sufficient amount of money for their retirement. Due to the auto-enrolment, it is compulsory for companies to enroll the eligible workers into the pension scheme, in addition, the employers have to make payments into the scheme as well. It has resulted in a 43% increase in the number of people who contribute to the work-place pension. The contribution rates have risen from 5% to 8% in 2019, resulting in larger pension pots, after achieving the retainment age.
In conclusion, as a personal financial planner, I think that increasing the State Pension Age from 66 to 75 for both men and women by 2035 is not an appropriate solution to the issues faced by the UK of an aging workforce. The main reason are