Getting older is something few of us want to think about. Yet how we fund our later years, and how much we’ll get, has been a hot topic. The triple lock formula – state pensions increasing by the greatest of 2.5%, earnings growth, or inflation – means those benefits have risen far faster than the earnings of workers since its introduction in 2011. But as housing costs have also been rising fast, pensioner poverty has actually increased slightly in the last decade.
Nevertheless, even if you take those costs into consideration, pensioners are less likely to be in relative poverty – that is, having to get by on less than 60% of the income of the typical household – than families with children or working-age people. And funding the triple lock has already cost the state billions more than initially envisaged. With that cost set to balloon further, the debate over whether that is sustainable, or fair, has raged for a while. Andy Burnham intends to start a new system in a few years, which would see the state pension increase by at least inflation or 2.5%, and remove the automatic annual link with average earnings.
It will likely mean less generous increases, although it will keep track with earnings growth over the longer term. But are pensioners being short-changed in other ways? How do we compare with other countries? One way of measuring that is to look at how generous the typical pension is relative to workers’ average earnings – the replacement rate.
The OECD considers the outlook for those born at the start of the millennium in different countries on average wages, and assumes the pension system as it existed in 2022 is in place. On that basis, looking at the basic state pension, retirement benefits in the UK look low compared with other wealthy countries. And that is even when you consider that our system compels workers to be automatically enrolled in occupational schemes. If you consider both of those, then after tax, UK retirement benefits would be 54.2% of average UK earnings, compared with an average of 63.2% across wealthy countries.
Burnham vows to end existing pension triple lock in 2030 to help fund care State pension likely to top £13,000 a year What is the triple lock and why are people talking about it? But then there is income from other occupational and personal pensions, which are more prevalent in the UK. Include those and the gap narrows. However, that does also mean that those relying on just the state pension for their incomes are a fair bit worse off than many retired people elsewhere.
So does that make the case for boosting spending on public pensions in the UK? Well, the amount spent on the state pension is set to top £150bn a year, the single most expensive benefit to fund. But other figures from the OECD show that the UK state spends a lower amount on total retirement benefits, relative to the size of its economy, than the average wealthy country. But there are two issues to consider.
Firstly, this is about political choices, and the UK chooses to dedicate larger amounts to items such as universal healthcare. And secondly, with ageing populations, the OECD reckons the amount needed for pensions may be set to soar in many nations by 2060 (the exceptions largely being those that are deploying changes). Its predictions for the UK are likely to rise by less under the revised triple lock system being put in place by Andy Burnham but it may still mean more borrowing. As it is, £1 in every £13 the UK government spends is to pay the interest on existing debt.
And countries with more generous pensions, such as Italy, have faced pressure to reform. So in many ways, with auto-enrolment into workplace pensions, the UK appears to be ahead of the game in insisting on universal privately funded pensions for workers. But that system raises another issue: the gender pension gap. The gender pension gap is the difference between the average pension income of men and women aged 65 and over, as a percentage of men’s average pension income.
It found that the typical gap in most wealthy countries is around 22.8% in favour of men. But in the UK women typically get a pension that is a third less than what a man gets – in the main, due to the reliance on private pensions – although it should be noted that the most recent data the OECD has for the UK is for 2021. Women are more likely to have received lower pay over the course of their working lives, taken career breaks or worked part time. And the hit to pension pots can be stark.
So step back and look at the big picture and British pensioners – and those who have yet to retire – may feel others have it better elsewhere. But the message from all of this isn’t to dwell on outrage but to take action. The state pension has become more generous over the years, but if you want to enjoy the same kind of retirement as those elsewhere, get saving. That is – if you can, and if you haven’t left it too late.
