What happens when we get old?
What happens when we get old?
There are many words that can be used to describe the UK’s looming pension crisis. ‘Unexpected’ is not one of them. Alarms have been sounding for years about how retirement is becoming increasingly unaffordable for many. In 2019 (i.e. before inflation took off and the cost of living spiralled upwards) the Pension and Lifetime Savings Association calculated how much money a single retiree would need to spend each year to achieve a minimum, moderate, or comfortable standard of living. Those figures were £10k, £20k, and £30k respectively. Multiply that by the average number of years Brits currently live after hitting the traditional pensioner age of 65, and you’re looking at a required pension pot of between £185k-£555k if you’re a man and £210k-£630k if you’re a woman (who live longer). Across the UK population the median private pension wealth is currently £22,600 for men and £6,000 for women. This includes the fifth of the population who have no private pension at all.
Almost all Brits are currently entitled to a State Pension, paid by the government. But at its most generous, which is reserved for people who have worked consistently throughout their adult life, it pays out just £10,600 a year. There is also a rather large question mark over whether the government will keep paying out even this amount. Pension benefits currently swallow up 11.5 percent of all government spending. That proportion looks set to rise as the UK population is growing greyer: people are living longer and having fewer babies. That means a future of more state pension claimants at the same time as there are fewer workers paying tax. Plenty of policy wonks consider the status quo fundamentally unaffordable.
Most workers will have their pension pot topped up automatically by their employer, who are required by law to auto-enrol employees into a scheme that squirrels away a minimum percentage of their salary (usually 8 percent; 5 percent from the employee and 3 percent from the employer). But in general workplace pensions are much less reliable than they were a few decades ago, especially in the private sector. In the early 1980s, over a third of workers at for-profit private companies received ‘defined benefit’ pensions. These pay out a specific yearly income after retirement, with the amount linked to your final salary. Defined benefit pensions provide consistency and certainty for retirees, but they became unpopular with businesses because they are so expensive: there have been plenty of high-profile cases of firms running into financial difficulties because they can’t fund their large pension liabilities. So most workers have now been switched over to ‘defined contribution’ schemes. (Only 7 percent of employees at for-profit private companies were still enrolled in a defined benefit pension scheme in 2021.) The money you and your employer put into the pension pot is invested in the stock market, so how much you end up with depends partly on how well the markets do.
The upshot of all this is that wannabe-retirees will need to be increasingly reliant on their own individual savings to live comfortably in old age. The Pension Commission reckons that a good rule of thumb is to save 15 percent of your income every year for your retirement. Almost all of us are not doing this: 87 percent of private sector employees don’t meet that threshold.
It seems implausible that this is going to change for the better anytime soon, given that we’re currently in a cost-of-living crisis. Even amongst people who formerly had the means to put money aside, over half have now reduced the amount they save and a third have stopped saving at all. Another concerning trend is that record numbers of people in the UK have stopped working, largely because of long-term illness. In most cases, that means less income to draw savings from, no employer pension contributions, and possibly a reduced state pension because they’re no longer paying national insurance (which is usually taken out of pay packets).
This might all already sound bad enough. It gets worse. Younger generations seem likely to need much more money to live off when they retire than current retirees do. The reason is that many more of them will be on the hook for housing costs. 8 in 10 current pensioners are owner-occupiers i.e. they own a home outright. That means no rent or mortgage payment, which brings expenses down considerably. (In 2017 homeowners spent an average of 18 percent of their income on mortgage payments, and private renters spent 34 percent. Since then, mortgage and rent costs have increased dramatically.) Unless something major shifts in the housing market, a much larger number of people will still be paying these housing costs during retirement than did previously.
The one sliver of good news is that all governments will be highly motivated to fix the pension problem. Mass pensioner poverty would be exceedingly unpopular with voters. Not only do most of us dislike the idea of grannies shivering in homes they can’t afford to heat, the stakes could hardly be more universal - barring misfortune, we all grow old.
At the moment, a favourite solution of the UK government is to keep raising the retirement age. When the State Pension was introduced in 1948, men could receive it at 65 and women at 60. The retirement age is currently 66 for both genders and scheduled to be 68 by 2046. The financial logic is obvious: more years of people working means more years of people paying taxes and saving money. And the government is quick to point out that increased life expectancies means it is not actually reducing the number of years people can expect to be a retiree for. A major problem, however, is that the UK hasn’t done as good a job of increasing healthy life expectancy as it has regular life expectancy. As people grow older, a far larger proportion of them become disabled (45 percent of pensioners compared to 23 percent of working adults). Chronic health conditions make working much more challenging. So if the UK wants people to work later in life, it really needs to improve its health metrics. Unfortunately, these are currently trending in the opposite direction.
The other solution is to find more money to fund people’s retirements with. The government could try and nudge (or shove) people into saving more themselves, perhaps by raising the minimum workplace contribution above the current 8 percent. But it’s hard to see how this would work for people who simply do not have the financial resources to save more. Finding more funds for them would require the government to do one (or more) of the following: create more money by increasing economic growth, take out debt, cut spending from elsewhere and divert those funds to pensions, or increase taxes.