The question of longevity is now a major issue which governments across Europe need to address as increasing life expectancy places a heavy burden on treasury resources. Welfare and social benefi
The question of longevity is now a major issue which governments across Europe need to address as increasing life expectancy places a heavy burden on treasury resources. Welfare and social benefits for the elderly as well as pension payments spanning 20 to 30 years are no longer sustainable, even more so following the financial crisis. Governments have little choice but to ask people to work longer and may even have to ask them to pay more in tax to help meet the escalating state pension and welfare costs.
The situation is so serious that the UK government could increase the State Pension Age (SPA) every five years so that in 25 years people will have to work until they are 70 before receiving the ?old age? pension, according to a report in The Times. It quoted a source at the Department of Works and Pensions (DWP) as saying that the government did not want to ?revisit this issue year by year?.
The unions have slammed this as unfair, accusing the government of forcing people to ?work until you drop?, pointing out that lower income manual workers with lower life expectancy would need to work until the state pension age to maintain an income.
The Conservative and Liberal coalition government in the UK wants to raise the state pension age for men from 65 to 66 from 2016, and to 68 by 2046 with women retiring at these ages a few years later than men. Under the previous Labour government the SPA was set to increase to 66 between 2024 and 2026, then to 67 between 2034 and 2036, and to 68 between 2044 and 2046.
Increasing the pension age by just a year, would save an estimated ?13 billion a year.
The Liberal Democratic pensions minister, Steve Webb, said: “We do have to rebalance things. The two numbers ? retirement age and life expectancy ? currently have little relation now and there does have to be a link. Not a rigid rule, but more of a link. Some people are now having decades of retirement. In the short term we are reviewing retiring at 66, but very slowly we have to look at what sort of principles we apply beyond that.“
A review of the SPA designed to “reinvigorate the pensions landscape” is underway and will consider the timing on when to increase the SPA; phasing out the default retirement age where employers can lay off staff at 65; re-linking the basic state pension to earnings; automatic enrolment into a pension scheme for employees from 2012 and a review of public service pensions.
The pension review entitled ?When should the state pension age increase to 66?? produced by the DWP contains a ?call for evidence? and invites organisations and individuals to give information relevant to the timing of an increase to 66 between 24th June and 6th August 2010.
The document said that the ageing population has wide fiscal implications. ?It has an impact on direct age-related expenditure, which is projected to increase by over 2% of the gross domestic product by 2029-30. But there is also a positive impact on tax receipts and the wider economy through people working longer.
?When the first contributory pension was introduced in 1926 men receiving it lived, on average, until the age of 76. Today men are expected to live until 86. For women, the increase is from age 78 in 1926 to 89 today. This increased longevity is projected to continue: compared to today, the number of people over 65 will be half as many again in 2030, and will have doubled by 2060?.
The current state pension ages were set when people were expected to live approximately seven years in retirement. The present SPA is 65 for men and rising from 60 to 65 for women between April 2010 and April 2020. But people are now living up to 30 years in retirement putting huge pressure on government finances.
While there are countries with a lower state retirement age than the UK, many are increasing their state pension age to reflect the changing demographics and current fiscal situation.
*Australia has a SPA of 65 for men and 64 for women, increasing to 67 beginning in 2017 by six months every two years.
*Denmark is increasing its SPA from 65 to 67 between 2024 and 2027.
*Ireland is increasing its SPA to 68 by 2028.
*Iceland?s SPA is currently 67 years.
*Germany?s SPA at 65 is due to rise to 67 between 2012 and 2029.
*France has announced proposals to increase its SPA from 60 to 62 by 2018.
*Spain wants to raise its retirement age from 65 to 67.
So it is not just in the UK but across Europe and the rest of the world where governments are feeling the strain of maintaining pension and health payments to retirees. Government funding will have to come from increasing the working age and reducing the length of time pensions are paid. I would also not be surprised if we saw governments increase taxation in one way to another to help fund the costs ? the French government, for example, has already published proposals to this effect.
Life spans are extended by better quality food consumption and improved healthcare. In time life expectancy will increase further and the SPA will have to be increased along with it. Official figures from the Office for National Statistics already reveal that men will live on average up to 1.5 years and women 1.6 years longer by 2026 than the current predictions indicate.
Planning for longer life in retirement should include an investment programme designed to help you maintain your comfortable standard of living in your later years, as well as leaving wealth to pass on to your family should you so wish. A strategic portfolio would allow for regular income if required and capital growth to outpace inflation. A wealth management specialist like Blevins Franks can advise you on an investment strategy suited to your time horizon, financial objectives and personal circumstances.
By Bill Blevins, Managing Director, Blevins Franks
30th June 2010