While the Government has already legislated for the state pension age to rise from 65 in 2020 to 66 by 2026, 67 by 2036 and 68 by 2046, PwC claims there is a fundamental question as to whether this goes far enough, particularly given the sharp rise in UK public debt due to the global financial crisis since this legislation was introduced in 2007.
A report from the organisation argues an attractive option to offset part of the fiscal cost of an ageing population is to raise the state pension age, which would both reduce state pension spending and boost tax revenues as some people choose to work longer as a result.
The report suggests that the Government needs to implement a phased increase in the to 70 by 2046, which would have an estimated net fiscal benefit relative to current plans of around 0.6% of GDP in 2046, or around £9 billion at 2010/11 GDP values.
The report estimates that this would cover around 60% of the projected rise in state pension spending between 2010 and 2046, which is driven by the policy of re-indexing the basic state pension to earnings rather than prices before the end of the next parliament. A higher state pension age would help to fund this more generous future state pension without adding further to the burden of public debt and taxation on younger generations of workers.
The net fiscal benefit from raising the state pension age to 70 (rather than 68) by 2046 would be equivalent, according to illustrative calculations in the report, to avoiding a tax rise at that time of just under 2p on the basic rate of income tax, or just under two percentage points on the standard rate of VAT.
The report also identifies a wider programme of change that requires government, employers and employees to embrace new approaches to the delivery of health, social care and adult skills. This would include scrapping the increasingly anachronistic Default Retirement Age for employees, although this change would need to be announced far enough in advance to allow employers to plan effectively for this change.
John Hawksworth, head of macroeconomics at PwC and co-author of the report, said: "The sweet spot enjoyed by the economy during the past 30 years as the post-war baby boomers moved through the workforce has the potential to turn sour as longer periods of retirement leave a lasting and expensive burden on smaller future generations of workers. Either taxes will have to rise or other policies need to adjust to deal with the higher costs of state pensions, health and long-term care, as well as the large debt hangover from the global financial crisis.
"A phased increase in the state pension age is part of the solution and the Government already has plans to increase this to 68 by 2046, but we believe it needs to go further and faster with state pension age rising to 67 by 2030 and 70 by 2046. The estimated net fiscal benefit of this policy of around £9 billion per annum at today's values would cover the majority of the costs of a more generous earnings-indexed basic state pension. This would restrict greatly the spread of means-testing for future pensioners and avoid adding to the already large burdens of public debt and taxation on the children and grandchildren of the baby boomers."
