Will massive costs mean state pension is scrapped?

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pensioners in a nursing homeJohn Stillwell/PA Archive/Press Association Images

The Department for Work and Pensions has revealed that the cost of providing benefits to pensioners is currently a staggering £90 billion. However, the truly alarming figure it released yesterday was that in 50 years time that bill is going to quadruple - to £419 billion.

And this could spell the end of state pensions as we know them.


Rising costs

The bulk of the cost of pensioner benefits is the state pension - which currently costs £60 billion and is set to rise to £302 billion by 2061. Even over the next 20 years the bill for the basic state pension almost doubles to £116 billion.

We have to add into this the state second pension, which rises from £15 billion today to £109 billion in 2061/62.


Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, says: "The really scary thing is that these figures are inflation-adjusted, nominal figures would be even bigger. And they don't include the £1 trillion of public sector pension liabilities!"

Other benefits

There are also a number of other benefits available to pensioners, such as free bus travel, free TV licences and the winter fuel allowance. Recently they seem to have dominated all the talk of cuts.

However, their total cost is just £3 billion, and although this is set to reduce to £2 billion by 2061/62, it's clearly just a drop in the ocean - which McPhail calls: "a side-show of a side-show."

Affordability

The figures remain extraordinary, and raise the vexed question of how on earth we are going to afford all of this.

McPhail has a stark warning: "The answer is we aren't. The government is almost certainly going to have to raise retirement ages and water down state pension benefits. The bottom line is there is little other choice. It may well do this on the sly, by tinkering with the inflation link, or indeed by changing the definition of inflation - which they are considering at the moment."

"It's unlikely to happen all at once. The last government got the ball rolling, the current government is giving it a good heave, and no doubt future governments will keep it in motion. The result is that tomorrow's pensioners are likely to suffer death by a thousand cuts to their state pension entitlement."

What can you do?

This will mean that those without private provision will be left high and dry. You may think you can look forward to a state pension you can afford to live on - but as your retirement age draws closer it could all change. As McPhail says: "What you get from the state might be like that pot of gold at the end of the rainbow. You might actually finally catch up with it, only to find out it is little more than a few chunks of lead."

The only safe option is to assume you will have to look after yourself. Stephen Gay, Director of Life, Savings and Protection at the Association of British Insurers says: "It cannot be stressed enough how important it is to save for retirement... The fact that we are living longer is great, but we can no longer have our heads in the sand about how we fund our income in retirement. The state pension is a foundation, but most people need more and the earlier people start to save the easier they will find it to build enough savings for their later life."

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