Reinventing the State pension
- Michael Hill
- Jul 15
- 2 min read
Could the State pension be replaced with a more flexible income scheme? A new report thinks it would be possible.(1)
There are now 12.6 million people over State pension age (SPA), meaning that government expenditure on the State pension is about 5% of gross domestic product (GDP), second only in cost to the health service.(2) Work carried out by the Office for Budget Responsibility (OBR) projects that by 2070, the pension outlay will rise by over half, as pensioner numbers increase to more than 18 million.
Politicians have long been aware of this rising bill, but their manifestos have suggested the opposite. No political party wants to be the first to promise less generous benefits for pensioners; a slice of the electorate with a greater than average propensity to vote. So, it is perhaps appropriate that the think tank of a former politician, Tony Blair, should propose a radical solution.
The Tony Blair Institute (TBI) wants to scrap the State pension and replace it with a Lifespan Fund from 2030. Three major reforms would be bundled together in the move, according to the TBI:
Triple lock replacement: Instead of payments rising each year by the greater of earnings growth, price inflation and 2.5%, increases would follow a smoothed earnings link, keeping pensions aligned with earnings over the long term, while ensuring their value never falls in real terms. This approach mirrors a proposal made by the Institute for Fiscal Studies.
Payment flexibility: This provides an option to bring forward some State pension entitlement during a working life, e.g., on unemployment or retraining, and then rebuild it on return to work by paying higher contributions. The TBI suggests that this “would effectively be a loan from an individual’s own future pension”.
End a fixed State pension age (SPA): Instead of one SPA for all, the aim would be to create a uniform 20-year entitlement. In practice, within limits, you could choose when to retire and then receive a personalised State pension payment “calculated on an actuarially fair basis”, using information about your age and health circumstances.
The TBI proposals have received much criticism on grounds of complexity, practicality, privacy and political reality. However, their main justification – spiralling government cost – has not been challenged. If nothing else, the TBI has underlined the dangers of relying solely on the State pension in retirement.
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