As societies worldwide get older, the debate over raising the state pension age becomes increasingly pressing. Aging populations, coupled with declining fertility rates and rising life expectancy, are reshaping the landscape of public spending, particularly on pensions. Many countries are grappling with this demographic shift by considering, or implementing, increases in the state pension age.
Professor Ian Tonks and Professor Edmund Cannon address this issue in a recent Economics Observatory article asking ‘Should the state pension age go up in countries with ageing populations?’, published in April 2024. Below are some of the key findings.
This question has gained prominence in the UK following a report by the Parliamentary and Health Service Ombudsman regarding changes to women’s pensions implemented after 2010. These changes, embedded in the 1995 Pensions Act, aimed to gradually equalise pension ages between men and women by 2020. However, inadequate communication about these changes led to complaints of maladministration.
Why might state pension ages need to rise?
Data from United Nations DESA reveal significant shifts in life expectancy and fertility rates over the past century. With life expectancy steadily climbing and fertility rates declining, populations are ageing.
Trends in life expectancy and fertility: historical and projected values
(Source: 2022 United Nations DESA, Population Division)
This trend is evident across developed countries, as shown by demographic ratios from the United Nations illustrating the increasing proportion of elderly individuals relative to the working-age population.
Demographic old age to working age ratios, 1950-2080
(Source: United Nations, 2019; for future periods: medium-variant forecast)
Governments respond to these demographic shifts by adjusting pension policies. In the UK, for instance, legislation like the Pensions Acts of 1995 and 2011 incrementally raised the state pension age to address gender disparities and adapt to changing demographics. Similar adjustments are seen in other European countries, though they often face resistance.
How have pension policies changed to accommodate ageing populations?
Traditional pay-as-you-go pension systems are giving way to defined contribution schemes, empowering individuals to save for retirement. In the UK, auto-enrolment in workplace pensions has significantly boosted participation rates, with employees and employers contributing to pension funds.
Defined contribution schemes offer flexibility in retirement planning, allowing individuals to access accumulated funds through various avenues. However, there are concerns about the adequacy of pensions, particularly in worst case scenarios.
Research by Professor Tonks and Professor Cannon in 2013 indicates that while defined contribution pensions can provide acceptable retirement incomes on average, there are risks of inadequate pensions for some individuals. Factors such as investment returns and contribution levels influence pension outcomes, highlighting the importance of informed retirement planning.
This article explores how the retirement age can serve as a policy tool for governments to manage transfers between working and retired populations. Altering the state retirement age effectively adjusts the ratio of the working population to the retired population. Governments undertake this adjustment to ensure the sustainability of the state pension system.
A longer version of this article was published on the Economics Observatory on 17 April 2024 (available here).
Find out more about financial markets research at the University of Bristol Business School.