Is the state pension really ‘a Ponzi scheme’?

By the time I celebrate my 68th birthday in the year 2045, I doubt very much that the UK state pension will exist in its current form.

The combination of our ageing population and generous increases guaranteed by the “triple lock” means the government is writing a blank cheque for future taxpayers to fund.

Promising to increase the state pension by the higher of average earnings, inflation or 2.5 per cent buys the “grey vote”, but we simply don’t know how many billions of pounds this will cost future generations.

In the political row this week over what measure of earnings should be used to calculate next April’s increase, work and pensions secretary Mel Stride admitted the triple lock was “not sustainable”.

FT readers were far more succinct in their online comments: “It’s a Ponzi scheme!” said one, summing up the views of many.

What gives younger voters like me grey hairs is worrying what the state pension could look like by the time we retire.

Look at your payslip, and you could be forgiven for thinking that the column showing your national insurance contributions is ringfenced and invested for your future in the same way as the column showing your workplace pension contributions. Not so!

The state pension is not a contributory system. It rests on an implicit social contract: tax and NI deducted from workers’ payslips today is what’s funding the state pension payments made to older generations.

As the population ages, funding the state pension in its current form will become even more expensive. To temper this, policymakers could keep increasing the state pension age (a decision on this has been conveniently delayed until after the election) or eventually be forced to take a much more radical approach, such as means testing.

Either move would be politically explosive — but the future sustainability of the state pension is not a debate we can defer forever.

Meanwhile, the current lot are fretting over whether pensioners will forgive them for increasing payments by 7.8 per cent next April (by stripping out the one-off boost from the NHS pay settlement) rather than the full 8.5 per cent earnings growth figure reported on Tuesday.

Seeing as the Conservatives appear to be on a path to electoral defeat, let’s hope they have the gumption to go with the lower figure. This would send a strong signal to voters and the next government that reforming the state pension, however uncomfortable, is unavoidable.

Dealing pensioners a winning hand with the triple lock means the government spends an additional £11bn a year on state pension payments, according to a study this week from the Institute for Fiscal Studies.

“Back in 2010 when the triple lock was introduced, nobody would have ever predicted it would be costing this much by now,” says Jonathan Cribb, associate director at the IFS.

He says that this week’s events have “made it more obvious how expensive the state pension is, but also how unpredictable the level of future increases could be”.

This is partly because the earnings boost from one-off events such as furlough or the NHS pay settlement are baked in to subsequent rises, compounding future costs.

Is it right that a greater share of taxpayer cash goes towards funding healthcare and state pensions for boomers with assets that younger workers can only dream of possessing?

Maintain the triple lock until 2050, and the IFS estimates that additional spending on the state pension could be anything from £5bn to £45bn a year in today’s terms — a vast range, making it much more difficult for the government to plan its future finances.

It will be impossible to make changes that are “fair” to everybody, but the uncertainty over future policy is making it much harder for individuals to plan their retirement strategy.

People on lower incomes often rely solely on the state pension to fund their retirement, but face having to wait longer to get it. Manual workers will be (for want of a better phrase) too knackered to keep working into their eighth decade. Meanwhile, higher earning workers with longer life expectancy will squeeze more out of the system.

And then you have generational fairness. Pensioner benefits have been protected in a way that working age benefits have not.

Is it right that a greater share of taxpayer cash goes towards funding healthcare and state pensions for boomers with assets such as property and private pensions that younger workers can only dream of possessing?

This imbalance will only get worse as time goes on.

Cost of living pressures mean growing numbers of people are opting out of workplace pension saving. Those who are saving contribute around 8 per cent of salary when studies say 15 per cent is what most should be aiming for (and this assumes the state pension will be there as the foundation).

“The state pension is increasingly important for those on lower incomes, but it’s still really important for middle- and indeed high-income workers too,” Cribb says.

I’m in the lucky position of being able to afford to invest more into my private pension if the state pension age rises, or some form of means testing reduces what I might receive. But I’d have to save a lot more to replace it entirely.

“Try and buy an index-linked annuity paying the equivalent of £220 per week for life, and it would cost you something like £225,000 today,” Cribb adds.

The thought of that could frighten some people into saving more — but a lack of trust in the system is a huge disincentive against pension saving altogether.

This adds to the (not inconsiderable) uncertainties facing those saving for retirement. Generations who have missed out on the security of final salary pension schemes already face the challenge of managing a finite pot of investments into their old age — most without help from an adviser.

We are having to manage investment risk in a way that older generations have not. Receiving some level of state pension as a financial bedrock will be even more crucial.

And, as we heard from readers of all ages at the recent FT Weekend Festival, frequent political meddling with pension regulations is making a bad situation worse.

To give us more confidence to plan for the future, we need to stop short-term political consequences from dictating long-term pensions policy.

Cross party agreement was obtained for pensions auto enrolment, which has boosted the retirement prospects of millions. Considering the potential £45bn a year cost of the triple lock in future, we need politicians of all colours to accept it simply cannot continue.

If we take the political heat out of the debate, policymakers can focus their energies on shaping a future system that would support pensioners, but not be unsustainably expensive. It’s not going to be easy, but simply agreeing that we need to start looking for a solution would be something worth celebrating.

Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb