Vive La State Pension

Last week, French President Emmanuel Macron introduced plans to change the state pension in France. To reduce the costs of funding the scheme, Macron announced an increase to the state retirement age from 62 to 64 which is set to take effect by 2030. He also announced an increase in the number of working years required to qualify for the full level of pension from 41 to 43 years. As expected, in a country notorious for its long history of revolt, the policy was met with fierce opposition and ongoing strikes across the nation. Admittedly, it’s difficult to find empathy for the French who have one of the lowest retirement ages in Europe – Especially while we poor Brits must wait until age 66 (or 68 depending on when you were born). However, the changes made to French pensions could affect us more than we think and highlights the wider demographic issues which many developed countries are facing.

Since the introduction of the British state pension in 1909, the scheme has experienced significant changes, but the principles of the pension funding model remain the same. Essentially, the funding of our state pension is reliant on having a large pool of young working people who are paying into a pot for the retired. This system worked throughout most of the 20th century as there was a high replacement ratio of people and a short life expectancy after retirement. However, the demographic composition of the UK has gradually changed over the last century. Advancements in technology and higher living standards mean that our population is now living longer and having fewer children. In the past forty years, the UK has experienced fertility rates below the replacement level of 2.1 children per family. While at the same time, life expectancy from birth increased from 74 in 1982, to 80 towards the end of 2022. The effect of this has been a steadily decreasing number of workers per retiree and aging labour force. This ‘silent-but-deadly’ structural shift has led to an increase in the cost of financing public services such as health, housing, pensions, and welfare. Thankfully, most of the deficit has been funded by the net contributions from immigration but is now under threat and declining.

In France, most have chosen to do away with voluntary occupational pension schemes which are typically confined to upper-level executives. Thus, private pensions make up a relatively small part of the overall pension market which is dominated by the state. In the UK however, private pensions are much more popular as a result of a long-term diminishing welfare state. Furthermore, with the introduction of auto-enrolment, workers have been further encouraged to take their pensions into their own hands rather than relying upon the state.

Macron’s announcement has perhaps been an untimely one, arriving just before the UK Government’s pension age review is scheduled for release in May 2023. With a similar demographic composition and system to France, the UK’s pension scheme is under the magnifying glass of scrutiny. The frequently pushed-back ‘pension goalposts’ highlight the importance of having an adequate retirement plan in place. But what about those that can't afford to do so? One of the core aims of the state pension is to reduce poverty in old age and provide a degree of income security. Raising the pension age at a time when we are facing a cost-of-living crisis would undermine this aim significantly and push the financially vulnerable of society into pension poverty and force them to work longer. Both issues seem to be particularly resonant at present, as in the second quarter of 2022, the number of UK over-65s in work hit a record high at 1.46 million people.

Creating effective policies in the face of challenging demographic change is no easy task. While raising the pension age would reduce public expenditure and move the scheme closer in line with the rise in life expectancy - it comes at the cost of pushing the vulnerable closer towards the poverty line. Ultimately, the government’s plans for the direction of the state pension will be revealed in May. On a wider scale, changing demographics is a problem that isn’t exclusive to the UK – Most developed nations are experiencing similar trends and issues, so a wider global response is needed to meet this pension challenge.

Lee Nguyen

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