Leo – LVI
The UK pension system has three pillars, the State pension which is government funded via national insurance, workplace pensions which are employer-arranged with automatic enrolment for many and personal pensions which are self arranged. The system works by combining these sources with contributions from you, your self employer and the government. There has been large amounts of scrutiny over the pension system of the uk due to the retirement crisis, with many facing inadequate incomes from poor private savings combined with state pension sustainability concerns. Moreover, the inequality in tax relief amongst the low productivity impacting wages ultimately highlights a system that struggles to deliver financial security for all generations.
The most important point in regard to the pension system is the fact that due to the inefficient system it is forcing people to work to an older age, creating a lack of productivity within the workforce. The state pension contributes and operates largely on a pay-as-you-go basis. This is a system where current workers’ National insurance contributions and taxes finance the pensions of current retirees, rather than using a personal, invested “pot” of money saved over someone’s working life. The main criticism of this system is the demographic pressure. The number of pensioners is increasing relative to the number of people in the workforce paying taxes. When the system was introduced, there were many workers for each retiree, but with increased life expectancy and lower birther rates, the ratio has shifted. This has negatively impacted the working-age population financially which is overall contributing to another one of the UK’s major problems being the lack of incentive to work. If people feel that everything they’re working for is going into someone else’s pension, why should they be working at all? It is human nature to be selfish when working which explains the majority of these peoples views. Hopefully after reading this section, at least if you are of working age and a working person you have a better understanding of where your hard work is going and why due to the fact that this work is going to other people instead of you, it has made you realise that this next lazy generation will be paying your pensions. The same generation that faces lower real wages, higher cost of living and ultimately a complete lack of incentive to even work at all.
Another, heavily criticised factor of the UK’s state Pension is the triple lock system. This is a government commitment to increase the basic and new state pension each year by the highest of three measures, average earnings growth, inflation, or a minimum of 2.5%. The main criticism of this system is that it is unsustainable and costs the government an absolute fortune. Everyone complains about how much the UK is in debt (£2.9 trillion) and the large amount of taxes everyone is paying, well the abolishment of the triple lock would raise a large sum of money. The annual cost of the triple lock is projected to reach around £15.5 billion by 2030 (BBC News) with the OBR saying it will be about “three times more costly” than originally predicted. The far more useful system is the double lock, meaning pensions rise with the higher inflation or average earnings, but without the 2.5% minimum floor. Although not perfect, the double lock could save several billion pounds per year in comparison to the current triple lock system.
There is yet another argument to be made in terms of why the UKs pension system is failing in regards to the way it disadvantages younger generations. I know I have ripped into this generation above, however I am still part of that generation so it is best I talk about the impacts faced by us. Although there is a huge rise in the cost of living and real wages overall remaining lower, younger workers are expected to find an increasingly expensive system through National Insurance. Although people may be willing to pay this knowing that in the future the younger generation will receive the same large pensions, that is the problem. There is no guarantee of that same level of support in 50 years time which emphasises the distrust and overall feeling of unfairness amongst the youth.
At this moment in time the UK pension system prioritises short-term political comfort instead of looking at the long-term bigger picture and the serious consequences that could arise from this system. By losing the trust of the very generation expected to fund its future, how can this system possibly continue and even be somewhat successful. The system simply needs change.