It’s no secret that the UK has an ageing population. The birth rate has been declining, and there is no escaping the fact that we will have more pensioners in the future than ever before. What’s more, we seem to be content with the idea of paying more out to pensioners every year.

Things Need to Change

The Telegraph recently lamented the lack of measures to help pensioners in the recent budget, with the headline: ‘Jeremy Hunt has just stuck two fingers up at pensioners.’

Let’s start with the cold, hard facts. The UK Government was forecast to spend £125.4 billion on the State Pension in the financial year 2023-24. The OBR estimates that pensioner benefit spending, amounting to £138 billion, will comprise 11.3 per cent of total public spending. A report by More or Less from BBC Radio 4, reveals that 27 per cent of pensioners live in ‘millionaire households,’ whether or not they are the head. Finally, the UK state pension, currently set at £203.85 per week, will rise annually according to whichever is the highest: average earnings growth, Consumer Price Index (CPI) inflation, or 2.5 per cent. This mechanism is better known as the ‘triple lock.’

Here’s another interesting fact: the state pension is not means-tested. Anyone with enough years of National Insurance Contributions (NICs) will receive the full £203.85 per week — that’s £10,600.20 per year. In February 2023, 12.6 million people were receiving the state pension. Using the More or Less figure of 27 per cent of pensioners living in millionaire households, that comes to £34.8 billion in government spending on pensions that may not even be necessary. Given this country’s limited fiscal headroom, the mind boggles how this could escape the government’s notice.

A Fairer System of ‘Super Funds’?

Governments with the political will can reform the pension system. Australia did this 32 years ago when Paul Keating introduced the superannuation scheme. This is where employers contribute a mandatory percentage of their salaries to ‘super’ funds, supplemented by voluntary contributions either from employers or individuals, and the government matches contributions for low-income individuals, as outlined on page 2 of a 2013 report from the Association of Superannuation Funds of Australia (ASFA). In short, people only receive a state pension if they do not have enough super funds to live comfortably, saving the government money that can be better spent elsewhere. Naturally, it is not a perfect system (retirees can, for example, spend their super funds too quickly), but it is much better than what we have in the UK.

So here’s what we can do. Reform the pension system to create a similar scheme to Australia’s superannuation programme. Make the State Pension means-tested. Scrap the triple lock and increase pensions annually by the CPI’s inflation rate, plus a small percentage — maybe two per cent.

The above system creates better value for money, protects pensioners’ ability to have a comfortable retirement, and enables the government to build a fairer economy with a more balanced budget. All that is needed now is the political will to see this reform through Parliament — something that has been lacking for far too long.

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