Plans to link retirement age to life expectancy are being studied by the man in charge of welfare reform.

A simple and obvious thing which we deperately need to do.

How and when you retire on your savings or private pension arrangements is of course entirely up to you. But the State pension should really be seen as a form of social insurance. Insurance against living longer than your savings.

When the various systems came in (Bismark in Germany, Lloyd George here, FDR in the US) the age at which you got your state payments was around and about the average age of death. For good reason too.

As a rational 20 year old (just as an example) you could expect to live a further 45 years (again, just an example). Of course you don\’t really know what your lifetime earnings are going to be but you can at least make some assumptions and plan for that expected lifespan in your savings habits.

But what happens if you hit 68 and are still going? You\’ve acted rationally and responsibly but now you\’re skint. In comes the State pension. Insurance against outliving your savings.

However, average lifespan is now something like 78 for men. The retirement age is still 65. Far from the State pension now being social insurance it is now social assurance. It\’s gone from being a payment against a risk of outliving your savings, something unlikely, to being a method of paying for something which is likely, your living past that state retirement age.

The old age pension should therefore be returned to what it originally was: that social insurance. The pension age should be set at the average lifespan. Yes, we don\’t know what the average lifespan of the current cohort is, so we\’ll use the cohort before. But that would mean that the state pension age rises to 78. And as lifespans continue to lengthen, it will rise further.

Politically this is of course horribly difficult. But as a matter of economics it\’s an obviously good thing to do.

20 thoughts on “Yes!”

  1. Probably not a bad idea… Just as long as the “premiums” are adjusted in order to reflect the expected much shorter pension period.

  2. Politically this is of course horribly difficult.

    No, it’s impossible. Labour voters will think “eeek, abolition of welfare state”; (median) Tory voters will think “I’m old, so no bloody chance, chum”.

  3. Good post. There is quite a bit of research going on – I think Nottingham University and the Cass Business School have done stuff on this – on the issue of how to hedge against what is known as “longevity risk”.

    One way that people could hedge this risk is to hold shares or securities issued by firms such as those running residential homes for the elderly, pharma firms, medical devices companies, and the like. If people are living for longer than the actuaries think, then such firms are likely to be making outsize gains.

  4. This idea has been around for years but goes nowhere for the fairly obvious reason that there is no job market for sixty and seventy year olds.

    Only the state guarantees to employ people up to retirement age, which is why I suggest reserving state employment for the over forties. It also prevents people from going straight from a left wing madrassa into public service.

  5. Going to be damned hard to do this, though I admit something must be done.

    Those of us presently looking at the size of the private pensions we are likely to collect in the next year or two are going to be hard to convince. My schemes are offering a few hundred a year on investments of a few tens of thousands, often painfully found.

    A halfway house might be to look at the age at which one really has to give up working, though that will vary according to the individual.

    For instance, I do not expect to give up working until perhaps my seventies, but I am in white-collar self employment. My plumber has a shocking back from the nature of the the work he has done for decades under floorboards and so on, and will have to pack up, if he can, in his fifties.

    It isn’t a simple matter of manual versus sedentary work: my Dad retired as a cattleman at 79. And I would expect to wind down rather than stop.

  6. ” I suggest reserving state employment for the over forties”: brilliant. And perhaps also for those fit only for desk work, ex-plumbers and so on.

  7. While I was composing, Roue le Jour posted a thought which I find quite arresting.

    I would add to his or her reasoning: reserving public jobs for those over a certain age and experience would almost certainly improve the quality of those working in the public service.

  8. Very good idea, a solution tailored to the problem.

    But making the change from where we are to where we need to be in any sensible timescale is effectively impossible for political and financial reasons as a couple of folk have already said.

    How do you suggest we make the move?

  9. One should also recognise that this isn’t only an issue for public pensions, but any pension. If an economy has 25% of people retired, rather than 105%, then if say those pensioners want to have an income equivalent to half the average salary, they need to be able to claim (in whatever way – tax, dividends, asset sales) 1/6th of the working population’s output, as opposed to 1/15th.

  10. My proposal also releases young people to where they can do the most good, paying tax in the private sector. It makes excellent sense to me. If anyone can see a catch please comment.

  11. RlJ: no catch, except perhaps that it might be hard to recruit very high quality people who are just about to enjoy and profit from their best and most effective years in the private sector.

    However the maturity and experience of the others should make up for that.

    Another plus might be on offer. I have the impression that hereditary benefit claimants are not only to be found on sink housing schemes; that sons and daughters are following mothers and fathers into non-jobs in council offices and quangos.

    Breaking that cycle could only be good.

  12. This idea has been around for years but goes nowhere for the fairly obvious reason that there is no job market for sixty and seventy year olds.

    Except in the oil business. It is so short of experienced people some offices look like a retirement home. Plus, the old farts often get to be posted to places where the local 20 year old women will put out for money.

  13. As Roue le Jour says, the problem is that people in their 70s are often – but not always – unable to work or find it very difficult to find work, which would leave otherwise pensionable people on the dole or incapacity benefit. No saving for the state there. The measure of healthy life expectancy might be a more appropriate yardstick. Figures vary but this seems to be 65-70 years for us Brits.

  14. It should be linked to the age when people become frail or find work too tiring, not to the average of death because the currently fashionable idea is to postpone death at any cost (to the patient, I mean, not to the NHS budget!).
    The Normal retirement age (around which variations would be made to account for individual’s health and strength, whether physical or mental) should be 70 by now. I am physically slowing down but I see no reason to give up work before I reach 70.
    Snowdon is right as far as it goes but healthy life expectancy would leave most* people no time to rest and enjoy one’s savings. It is good economics to encourage people to save up for a happy retirement as those savings create the capital for investment.
    * The median is less than the mean so a majority will be unfit to work (or dead) when they reach the “healthy life expectancy”

  15. I understand the logic of the argument in this post. But a deferment of the state pension age would be a bit harsh on folk who have not had access to a decent company pension scheme, despite having worked and paid their stamp for 45 years. It would tend to hit the lowest paid people, who would then be unable to retire.

    In the state system, the difference in pension benefits between people with a patchy contribution record, and those who have a consistent record, is minimal. So perhaps a good first step would be to tighten up the coupling between contributions, and pension benefits.

    If you want working people to make extra sacrifices, you have to prove to them that they aren’t just featherbedding the same freeloaders.

  16. … which is why I suggest reserving state employment for the over forties.

    Interesting idea, but we will need to have exceptions for the armed forces, police, fire fighters etc.

    Before we had state pensions, we used to have other schemes for supporting people too old/unhealthy to work. The main one was called “families”, with “communities” and “charities” providing secondary support. Why not go back to that?

  17. If typical government expenditure were reduced, as a proportion of GDP, from 40% to 33%, we would, on average, be able to increase our pension investments annually by 11.7% of income net of tax.

    Given current government expenditure as approaching 50% of GDP, reducing that to 33% would allow us each to increase pension investment annually by 34% of income net of tax.

    With another 7% to 17% of GDP being spend on productive labour, rather than government labour, that might also help: perhaps by reducing prices of things we need by those sorts of amounts.

    Might those 18.7% to 51% improvements be enough?

    I do hope (really really) that I haven’t counted anything twice; just assumed that anything government does over 33% of GDP is so inefficient and wasteful that it is of negligible value.

    Best regards

  18. This is silly. As if it’s only rational to prepare for events that are more likely than not.

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