Justifying increases to pension age

Posted on by Alison O'Connell

Two approaches to the rationale for increasing the age of eligibility to public pensions.

Raising the age of eligibility for state pension (superannuation) is a simple and transparent match to the trend of increasing longevity.  Around half of OECD countries are raising the age from the current average of around 65 years, but at different speeds. The UK, Ireland and the Czech Republic have plans to go the furthest, to age 68 years, and other countries have formulae that may take them beyond that.  The countries with no plans to increase beyond age 65 include Germany, Finland, Japan and Sweden.

New Zealand used to be in the second list, but its Prime Minister announced in March 2017 plans to increase the age of eligibility for New Zealand Superannuation to age 67.  The legislation will progress in 2018 if the same government is returned after a general election in September 2017.  The change would take place from 2037 to 2040.  Compared to other countries planning to move to age 67, New Zealand’s plan starts later and increases faster once started.

The UK is already on a track to increase its state pension age to 65 for women, and then 66 for all by 2020 and 67 by 2028. Beyond that, the plans to increase to age 68 by may be brought forward.

As required by legislation, a significant independent review has recently been published, alongside an analysis by the Government Actuary of how state pension age timetables might need to change assuming different links between the age and projections of future life expectancy.

The independent review recommended that the state pension age should rise to age 68 between 2037 and 39, which brings forward the previous plan by seven years (previously planned for between 2044 and 2046).

Justification and rationale

The UK reviews are comprehensive and represent a great deal of analysis, consultation and evidence-gathering.  The reports together amount to 190 pages, but this doesn’t count interim reports and supplementary data, as well as the policy commentary published by other organisations on the same theme. And these reviews are in response to legislation in 2014 and prior years which also gave rise to comprehensive analysis of the rationale for raising state pension age.

In New Zealand, the announcement was accompanied by a Cabinet Paper of 14 pages, and fairly short Treasury analysis papers. This does not indicate any lack of analysis, but reflects that the analysis had already happened over many years.  Every three years, the Retirement Commissioner must publish a review of Retirement Income Policy:

Backing the reviews were often substantive analytic reports. Other agencies also investigated the rationale for and effects of increasing eligibility age, including the Treasury in its Statements on New Zealand’s Long Term Fiscal Position. The last ten years has therefore seen a significant amount of work to build a rationale for – and an expectation of – increasing the age of eligibility for New Zealand Superannuation.

Role of longevity trends

The reviews of planned future change to the UK’s state pension age stem from the principle in the Pensions Act 2014 that people should spend a given proportion of their lives receiving a state pension.  That requires regular analysis of longevity trends.  The first independent review of this series also considered health trends, scheme affordability, pension outcomes, enabling fuller working lives and other state pension parameters such as indexation.

The rationale for the New Zealand change also put healthier, longer lives alongside “more fairly spread the costs and benefits of NZ Super between generations”, scheme affordability, timetabling practicalities and consistency with other countries.

*****For an update on New Zealand’s age of eligibility, see here*****

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