The Turner Report is about to appear. The Turner in question is the UK peer Lord Adair Turner, and the subject of the report the future of the UK pensions system. Although the final report is not due till the end of the month, the FT has been ‘ leaking’ some of the possible contents.
The commission will apparently suggest that the age at which workers can claim their full state pension should, over time, rise from 65 to 67. The increase is intended to come in stages, starting after 2020 when the UK’s womenâ€™s state pension age is set to be aligned with menâ€™s at 65. Thereafter, state pension age should rise in line with increasing longevity, the commission will say. Now this idea seems to me to be a very important one, and I’d just like to take the time out to explain why I think this.
Before I do so, a bit more background may be in order. The report, we are informed, is likely to suggest that at least nine million people in the UK are estimated to be saving too little for their old age. In fact, in its its interim report, the commission has already drawn the conclusion from this that unless tomorrowâ€™s pensioners are, on average, to be poorer, either taxes will have to rise, people will have to save more, or working lives would have to be longer.
The most probable response to this connundrum will be a mix of the three of these.
The important point to note about the UK situation is that it still has time to work on all this, and to try and get the balance right. Older countries like Germany and Japan are already having to face up to some of the unpleasant policy options involved. In Germany the incoming government is about to raise the VAT consumption tax by three percentage points, while in Japan PM Koizumi is pressuring hard on the Bank of Japan not to lift its monetary easing regime (or raise the zero percent interest rates in the short term) since the Finance Minister there also wants to address fiscal issues by raising consumption taxes, and a mixture of higher taxes and higher interest rates could easily derail Japan’s fragile recovery (also the ECB would do well to follow this debate, since raising rates in Germany would also imply a bi-fecta there).
Similarly Angela Merkl’s coalition is set to raise the retirement age in Germany to 67 (towards the start of the next decade IIRC) , while in Japan there is no upper limit, and participation rates at 75 are already in the 25% region.
Predictably the rumour that the UK retirement age may rise has proved controversial, with the Trades Union Congress being strongly opposed, using the not entirely unreasonable argument that any such rise would hit the poorest hardest because their life expectancy tends to be lower.
I favour raising the age (it is inevitable) but doing so by using a ‘moveable feast’ framework.
Now obviously the background to these pension decisions is a demographic one., and the ‘stylised facts’ of our present demographic situation seem to be that:
1/ We live longer, and will continue to increase our life expectancy.
2/ We have lower fertility
3/ We spend more years studying, and tend to leave the maternal nest later.
Actually I think all three of these may be connected in some way (but that’s for a later post). Right now I think the implications of this are that we need to displace the retirement age forward on a continuing basis. I think in a way it is a mistake (or a bad use of debate resources) simply to go for another revision of the retirement age to 67. This way of doing things is fraught with difficulty as each time you raise the age you need to confront the hostility of those immediately affected, who, it should be recalled, with a permanently inverted pyramid will always be disproportionately numerous (at least to some extent).
What we need is some sort of sliding scale. One way of doing this, for example, would be to remove the limit on retirement age completely. Have pensions systems based on years of contributions, which can be made at any age, and have the number of contributing years flexibilised depending on what is actuarily necessary to balance the fund in the long term based on the constant revisions of life expectancy.
In other words, every year, as well as existing pensioners being told how much their pension goes up (or down) depending on changes in the CPI, those working could be notified how many years of contribution are currently required in order to comply with the minimum conditions for retirement.
Contributing years are also relevant to address the kinds of concerns raised by the TUC. In fact those with lower life expectancy are normally also those with less education, and those with less education in principle start work earlier, so logically, under a contributing years system they could also retire sooner.
I also think there’s another advantage to putting life expectancy in relation with education rather than level of income, since some might think that being poor is something they can do little about, whilst being pooorly educated has a much more obvious and immediate solution.