Pension age: a third of adult life

One of the most intriguing statements in the Chancellor’s speech was the suggestion that the government is moving towards a formula for setting the age of retirement.

“We think a fair principle is that, as now, people should expect to spend up to a third of their adult life in retirement.”

It’s difficult to make out just what this means, for three reasons.  The first is the question of when adult life begins.  Many of the people retiring at present began their working life at age 16.    The age of majority is 18, and in England the school leaving age is set to increase to that point.  People who go to college may not start their working life until they are 21.  The difference of five years could make a difference of nearly two years to the proposed age of retirement.  A background note says that the government is planning to take 20 as the start of adult life.

The next wrinkle comes from that expression, “up to” a third.  That might mean that people should be able to expect that third, unless they die earlier.  However, it could also mean that this is a reasonable target for the maximum period of retirement, so that relatively few people will get it for much longer.

Then it’s not clear when this expectation applies – when someone starts their working life, when they are making pension plans, or when they retire.  I’d plump for the last of those, because anyone who dies before pension age has had to pay to benefit those who didn’t; and in the background note, that’s also what the government has gone for.

On that basis, someone who has worked from 20 to 66 should be able to expect to live to age 89.  That seems to imply that 66 is late to retire; 64 would be more justifiable.  That, of course, is what we would have had if male and female pension ages had been equalised reasonably, instead of just jacking up the female retirement age.

Having said all this, a third is not a bad rule of thumb.  It implies that if people’s life expectancy on retirement goes up from 87 to 93, pension age should increase by two years, which I think is more or less what’s being proposed.

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