The state pension has been the backbone of retirement for more than a century, but it cost the taxpayer £138 billion in the last tax year — and that bill will only go up.

It means that serious problems are looming for the next generation of pensioners, who no longer have the benefit of final-salary schemes and whose auto-enrolment pensions are generally considered to not be enough to provide a comfortable retirement.

Experts, including the former pensions minister Steve Webb, agree that an overhaul is essential. Webb is now a partner at the consultancy LCP, which is arguing that the state pension age should go up by a year every decade.

It’s report also suggests that pensioners should be guaranteed at least five years’ worth of state pension payments, with a lump sum paid to beneficiaries if they die within that time.

The UK’s state pension age is 66, but will gradually rise to 67 between April 2026 and April 2028. The investment firm Fidelity International this week said that the British state pension offered some of the lowest income support in the G7, giving pensioners just 22 per cent of their pre-retirement salary, compared with 76 per cent in Italy.

But while the state pension could seem low, the cost of providing it is becoming unsustainable. It represented about 2 per cent of GDP in the mid-20th century to about 5 per cent today and is expected to hit 7.7 per cent by the early 2070s, according to the Office for Budget Responsibility, the government spending watchdog. So, what could be done to fix it?

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The problem

The new state pension will rise 4.8 per cent in April, taking payments from a maximum of £230.25 a week (£11,973 a year) to £241.30 a week (£12,548). This is down to the triple lock, which guarantees rises in line with average wage growth, inflation or 2.5 per cent — whichever is highest. April’s increase will be in line with wage growth and will bring the annual amount to just a few pounds shy of the income tax threshold of £12,570. It means that more pensioners who get any income above the state pension, will be handing more of it over to the taxman.

The industry body Pensions UK produces standard of living calculations which suggest that a single person would need £13,400 a year after tax (including the state pension) to have a “minimum” lifestyle in retirement, covering basic needs only. A “moderate” lifestyle, which would include one two-week foreign holiday a year, occasional meals out and a car, would require £31,700 a year after tax while you would need £43,900 for what it deems to be a “comfortable” retirement.

Crucially though, these standards assume you will have no mortgage or rent in retirement, which is becoming increasingly unlikely for younger generations, who are buying houses later — if at all.

The average first-time buyer now is 32 and young people who do buy are taking on longer mortgage terms. The trade association UK Finance said that the average length of a first-time buyer mortgage taken out in August was 30.6 years — ten years ago the average was 28 years.

Housing costs took up an average of 28 per cent of the expenditure of the under 30s last year — 9 percentage points higher than any other age group, according to the Intergenerational Foundation, a charity.

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So there may be an even greater need for an adequate state pension, but who is going to pay for it? There are fewer taxpayers on the horizon, with women now having 1.44 children on average, down from a high of 2.93 in 1964.

Topping up the state pension with private or workplace pots seems the obvious answer, and the introduction of workplace auto-enrolment schemes in 2012 brought with it a new approach to retirement planning. We are now far more likely to have some form of private pension provision.

Marianna Hunt from Fidelity International said: “In the UK the state pension acts as a foundation or top-up, while in France and Italy it represents the mainstay of retirement income.” Fidelity’s figures did not take into account additional support, including pension credit (a means tested benefit), council tax discouts, the winter fuel payment and free prescriptions for over 60s.

But for those who are hoping to retire comfortably, private and workplace pensions are critical, Hunt said, with pensioners unable to rely solely on state support. The minimum 8 per cent contributions made through workplace schemes are, however, widely regarded as well short of what is needed to sustain a comfortable retirement, even alongside the state pension.

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The life expectancy problem

When the state pension was introduced in 1908, it was only available to those over 70 and was means-tested. It was a type of poverty relief for those “of good character”. In 1925 a contributory scheme started, with the age reduced to 65 (this was further reduced for women to 60 in 1940).

The 1995 Pensions Act equalised the state pension age between men and women, and the age for both went from 65 to 66 in 2020. The increase to 67 was brought forward by the coalition government and will be complete by 2028. It is expected to rise again to 68 between 2044 and 2046.

Life expectancy is, however, rising even faster. Between 1900 and 2000, the life expectancy of people entering the workforce went up 17 years. Pensioners today could spend more than 30 per cent of their lives in retirement.

How to fix it

There will be nearly 20 million people in retirement by 2075 and, even excluding the cost of providing government funded gold-plated public sector pensions, that is going to be expensive.

The Institute for Fiscal Studies, a think tank, found that state pension age would need to rise to 74 by 2068 to sustain the triple lock, while a 2022 review by Baroness Neville-Rolfe, a business leader and Conservative peer, suggested that there should be a fixed proportion of the average lifetime that people should get the state pension, set at a maximum of 31 per cent.

Increasing state pension age seems the obvious way to bring down costs, but would disproportionately affect those in parts of the country where life expectancy is lower. For example, in Blackpool, men get the state pension for an average of six years before they die, and women 11 and a half years. In Kensington and Chelsea, in London, it is almost 20 years for both.

LCP proposed a minimum payout period, which would mirror how private sector annuities work. Anyone reaching state pension age would be guaranteed that they, or their estate, would get at least five years’ worth of payments.

“Those who have paid into the system all their lives would be guaranteed that they or their heirs would get a minimum payout once they start drawing a pension,” Webb said. “This would be a concrete way of addressing concerns over unfairness each time state pension ages are increased.”

LCP argued that this guarantee would only increase costs by about 0.5 per cent because most pensioners live more than five years.

The consultancy also suggested that state pensions should be paid for an average fixed period, such as 20 years. It argued that a progressive increase of state pension age by one year every decade would bring the system back into balance.

“We now have historically long retirements, which will inevitably prove fiscally unsustainable, said Stuart McDonald from LCP. “A new approach is needed.”

Letting the system catch up to the improvements in life expectancy would “be fairer to people of working age, whose contributions are used to pay the pensions of those who have retired”.

The pensions expert and Times columnist Tom McPhail has argued that the only way to save the state pension is to take it away from the under-75s.

The triple lock

The starting point for fixing the state pension is agreeing a new goal for the triple lock, said Tom Selby from the investment firm AJ Bell.

While it has boosted retirement incomes for millions, the triple lock has “throttled any sensible debate around how much the state pension should be worth and how long people should get it,” he said.

“The danger for younger people is that the longer those in power cling to the triple-lock pledge, the more likely it will be that the state pension age will need to rise further and faster to keep it on a sustainable footing.

“This also adds to damaging uncertainty about what the state pension will look like for future generations or if it will even continue to exist.”

However, “the longer the silence goes on, the more toxic that decision will become.”