Higher taxes and more debt are the only alternatives to real state pension reform

Engineering an exit from the European Union will be the most significant administrative challenge faced by Whitehall since the Second World War. But ministers must resist the temptation to put the public service reform agenda on the backburner. The economic uncertainty created by June’s referendum means that driving efficiency is now more important than ever.

A key question that landed in the government’s in-tray this week concerned the future of the state pension. The bill for this universal benefit is large and growing. At £90bn a year, it is one of the most significant line items of government expenditure. By the 2060s, the proportion of our national income spent on the state pension will have increased by a third, accounting for 7.3 per cent of GDP.

Two factors are in play here. First, the so-called triple lock – which increases the state pension in line with the highest of wage growth, inflation or 2.5 per cent each year – has seen the value of this benefit soar against earnings. After housing costs, pensioners are now wealthier than working-age people.

A second driver is our ageing society. In the next two decades, the number of people over the age of 75 will double. That means more pensioners drawing a state pension, and for longer.

Increasing longevity is welcome, particularly because it has been accompanied by gains in healthy life years. But the policy framework needs to reflect our longer lives. The coalition legislated for future governments to review the state pension age every Parliament, guided by the principle that a third of adult life should be spent in retirement. A timetable of increases in the retirement age up to 68 was also written into law.

Yesterday the interim findings of this Parliament’s review – led by John Cridland, former director general of the CBI – were published. Over the summer, the Office for Budget Responsibility (OBR) argued that, in light of recent gains in life expectancy, the current timetable for retirement age increases needs to be accelerated and extended. The Cridland review gave some support to the former, but little to the later.

True, further increases in the state pension age would create policy challenges. Finding work in later life is difficult, which is why the recent focus on employment services for older people is warranted.

But those who resist future changes to the retirement age must also be clear about the financial trade-offs involved. Cutting the value of the state pension, increasing the tax burden on already stretched working-age people, or accumulating yet more debt – these are the only alternatives to tying the state pension age to life expectancy and abandoning the triple lock.

At the Conservative Party Conference earlier this month, the Prime Minister Theresa May said that her government would not be afraid to take “big and sometimes controversial decisions”. There are few – if any – votes in increasing the retirement age. But if the government is serious about delivering sustainable public finances, it is an absolute must.