Failing to increase the state pension age to 68 as the government had planned could cost the taxpayer more than £60bn, the Institute for Fiscal Studies (IFS) has warned.
The decision to bring forward the rise by seven years – so that it comes into effect between 2037 and 2039, rather than between 2044 and 2046 – was first announced by Theresa May’s government in 2017. The plan would mean millions of people being left waiting an extra year for their pension.
Ministers had until recently been expected to confirm the decision in their review of the pension age, which is due to be published by May this year. The government is legally required to publish such a review every six years.
But new reports suggest that Rishi Sunak’s government has now decided to delay the announcement until after the next general election, which is due to be held in January 2025 at the latest.
The delay is reported by the Financial Times to be due in part to a fall in life expectancy rates in the UK since the government’s last pensions review. The interim period was marked by the emergence of Covid-19, which has been implicated in more than 220,000 deaths in the UK.
Tory MPs also expressed concerns about voters having to work for longer, while chancellor Jeremy Hunt has relaxed rules for the wealthy by scrapping the lifetime allowance cap on tax-free pensions savings, which previously stood at £1m.
New analysis by the IFS suggests that putting off the pension age increase will cost the Treasury £8-9bn for every year it is delayed. This means that waiting until 2044 to start raising the pension age to 68 would certainly cost an extra £50bn, and probably more than £60bn, the leading think tank said.
However, the IFS pointed out that income poverty rates among 65-year-olds soared from 10 to 24 per cent when the state pension age was raised from 65 to 66, and urged the government to consider what additional support will be needed for those on lower incomes and in poor health.
The plans to raise the pension age were denounced by Labour as “an astonishing continuation of austerity” when they were announced in 2017 by David Gauke. But the former work and pensions secretary told the FT this week that the decision remained almost “certainly necessary” for “the long-term sustainability of the public finances”.
Government insiders insisted to the paper that, rather than being motivated by the Tories’ reluctance to press ahead with the increase in the year before an election – or the fact that a similar move has provoked widespread rioting in France – ministers need more time to study life expectancy data before making a decision.
“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 state pension age,” said Jonathan Cribb of the IFS.
“On the other hand, higher mortality rates in recent years mean 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. 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. There are significant long-term fiscal challenges coming from the ageing population, and delaying the rise in the state pension age will cost the Exchequer around £8-9bn for each year of delay.”
A Department for Work and Pensions spokesperson said: “The government is required by law to regularly review the state pension age and the next review will be published by 7 May.”