Delaying state pension age rise by 7 years will cost £60bn, says IFS

Last week, it was reported that ministers have delayed plans to raise the state pension age to 68 amid falling life expectancy in the UK.

According to the Financial Times, there have been warnings from Tory MPs that hiking the state pension age could provoke a backlash from middle-aged voters. 

Higher mortality rates in recent years means that any given generation is expected to live less long now than was expected at the time of the last pension age review in 2016

Jonathan Cribb, IFS

It is expected that the government will no longer increase the state pension age from 67 to 68 between 2037 and 2039, as had previously been announced in 2017. Under current legislation, this would mean that it would instead rise between 2044 and 2046. 

In a report by the IFS, it said based on evidence from previous increases, delaying the rise from age 67 to 68 would mean that around one in 10 people would retire at age 67 rather than 68 between 2037 and 2044.

The IFS revealed that this delay would cost the exchequer £8bn to £9bn for each year that it is delayed, meaning a seven-year delay would cost the government more than £50bn over the seven years, and more likely cost more than £60bn. 

Most of this is simply due to paying the state pension for longer, it said. On the other hand, income poverty rates among 65 year olds more than doubled, rising from 10 per cent to 24 per cent, when the state pension age was raised from 65 to 66. 

The IFS said the government should consider what additional support should be provided to those on lower incomes, and those in poor health and in their mid-sixties when the state pension age increases further.

Life expectancy is falling

IFS associate director Jonathan Cribb said: “Men and women born more recently are expected to live longer than their predecessors. That in itself is a strong rationale for a gradually increasing the state pension age. 

“On the other hand, higher mortality rates in recent years means that any given generation is expected to live less long now than was expected at the time of the last state pension age review in 2016.

“This provides a justification for delaying the rise in the state pension age from 67 to 68 that was previously planned for the late 2030s. But to do so would cost money.”

For people born in any given year, life expectancy has fallen, particularly in the most recent set of projections by the Office for National Statistics. 

For example, a man born in 1971 (and who turned 50 in 2021) is now expected to live to 83.9 years of age. In 2016, which is the year the information used in the first independent review of the state pension age, the ONS forecast the man’s life expectancy at age 50 to be 85.6 years. 

The equivalent life expectancies at age 50 for a woman born in 1971 was 88.1 years back in 2016, but is now only 86.7.

These falls in life expectancy provide a rationale for not increasing it as swiftly as previously intended, the IFS explained. However, it is still the case that life expectancies are rising when comparing people born more recently with those born in earlier generations. 

Even with a rise in the state pension age to 68, a man born in 1980 – who makes it to age 50 – would expect to receive a state pension for 17 years, the same as for a man born in 1950 who had a state pension age of 65. 

Equalisation of state pension ages for men and women has meant a bigger rise in the female state pension age, but a woman born in 1980 who makes it to age 50 facing a state pension age of 68 could still expect to receive the state pension for 20 years.

A spokesperson for the Department for Work and Pensions said: “The government is required by law to regularly review the state pension age and the next review will be published by May 7.”

This article originally appeared on FTAdviser.com