The UK state pension has long been the subject of some derision in the media. But is it really as bad as it’s made out to be relative to developed world peers?
In a nutshell, the answer is ‘no’. The UK’s state pension is not, at present, ‘uncompetitive’ relative to its national peers. So what’s behind articles suggesting the opposite, such as this one from the BBC or this one from the Daily Mail?
The OECD does not describe the state pensions that UK pensioners currently receive
The supporting data from these examples, and most probably other similar articles, comes from analysis by the Organisation for Economic Co-operation and Development (OECD). This analysis may be somewhat misleading for a number of key reasons:
- It does not describe the state pensions that are currently being received. Instead, the OECD takes a hypothetical 20-year old and projects future pensions according to what’s currently being promised.
- Countries are not necessarily compared on a like-for-like basis. This is due to the difficulties of classifying different pension systems. The analysis aggregates government pensions (so called ‘Tier 1’) and mandatory private pensions (so called ‘Tier 2’). For some countries private pensions are included and for others they are treated as optional. In particular, private pensions in the UK are treated as voluntary and therefore the impact of auto-enrolment is not counted in general pension provision. At the same time, the report includes similarly private pensions in the Netherlands and Denmark.
- Data doesn't account for fiscal affordability. The OECD data shows generous provisions in countries where governments have yet to make adjustments to future benefit promises to account for the fiscal affordability of today’s pay-as-you-go salary-linked pensions (such as France or Austria). It also doesn’t account for the fact that some counties, such as Germany, have discussed the reforms but haven’t yet started them.
Current poverty levels in UK pensioners are actually lower than in the general population
When you look at the relative worth of what pensioners are currently receiving, the picture is rather different. For instance, an average pensioner household is now better off than an average working age household. Similarly, poverty levels among pensioners are actually lower than in the general population.
That is not to say that future state pension provisioning in the UK is not without its challenges. Indeed, as we outlined in Ageing and wrinkles in public finances higher pension (and also healthcare) spending is going to be necessary to maintain the value of the state pension as our population ages and the ratio of pensioners to workers increases.
Future state pension provisioning in the UK is not without its challenges
In addition, further increases in the retirement age, cuts to the value of pension benefits (or the rates at which they increase, such as moving away from the triple lock) and raising taxes are all likely to be deeply unpopular. This leaves an uncomfortable choice – unpopular measures or increased borrowing.
But UK is not alone. Ageing populations are a global problem, meaning that other countries in the developed world are likely to face similar issues.
So the next time you come across a report of an article suggesting that the UK pensions among the worst in the developed world, I’d encourage a healthy degree of scepticism.