LAURE BOYER/HANS LUCAS/AFP VIA GETTY IMAGES
Just how generous is the UK’s state pension? Proponents of the triple lock, that magical heads I win, tails you lose mechanism that ensures the state pension absorbs an ever greater share of our economic output, might argue that by international standards our state pension is so shamefully niggardly that it needs to be raised. The triple lock, with its promise that payments will go up in line with the highest of inflation, earnings growth or 2.5 per cent is simply righting an historic wrong, they would argue.
There is some truth to this argument. International comparisons are complicated and must take account of many factors, such as demographics, tax rates, qualification periods, employment laws and more.
The UK spends a little over 5 per cent of its economic output on pensioner benefits, compared with an average of about 7 per cent for the 38 wealthy nations in the Organisation for Economic Co-operation and Development (OECD). Several countries spend more than 10 per cent, including Greece, Italy and France (more on the French in a moment).
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The UK’s new state pension of about £12,000 a year represents a net income (after taxes) of about 54 per cent of average earnings — considerably lower than the OECD average of more than 61 per cent and an EU average of more than 68 per cent.
This is not the whole picture though. For historical reasons the UK’s system relies more heavily than many others on funded quasi-mandatory workplace pensions, as well as private individual pensions such as self-employed self-invested personal pensions (Sipps). The UK’s funded pension system dwarfs the rest of Europe, with more than £3 trillion in assets, and after the US the UK is the second largest centre of finance in the world.
The fact remains though that on a simple measure of relative pensioner poverty the UK is lagging behind. Noting that relative poverty is a slippery metric to use, because if you want to reduce relative poverty you could just reduce average incomes across the board and, magically, relative poverty would reduce. Nevertheless, here in the UK 14.5 per cent of over-65s were living in poverty in 2022, compared with 5.8 per cent in France, where the state pension gives a net replacement rate of just over 70 per cent of average income, according to the OECD.
So there we go, we should be more like the French, right? Spend 12 per cent of GDP on pensions like they do and all will be well?
Not so fast. There’s a variety of activities at which the French have traditionally excelled where we can now give them a decent run for their money: making wine and soft cheese, cycling and going on strike spring to mind. When it comes to pensions too, I think our prospects may be better than theirs.
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The French population is a bit older than ours, with a median age of 43 compared with 41. They have a higher proportion aged over 65 and slightly higher life expectancy. So their demographic challenge is more acute than ours. The French system is built almost entirely on state provision, and this is where they are in trouble. The French national debt is about 115 per cent of GDP, compared with about 100 per cent here — we’re both in a hole, but theirs is deeper.
They’re running a budget deficit of more than 5 per cent, so they’re still enthusiastically digging that hole. What’s more, to get this budget through they had to agree to suspend the legislation raising their retirement age from 62 to 64. Yes, you read that right, they get to retire at 62. This, I suspect, is why when you look at international comparisons of pensions (see OECD, Mercers and the House of Commons library) the French system scores well for adequacy but poorly for sustainability.
Every country finds its own way. It is notable that many of the highest-scoring pension systems have a significant share of privately funded savings alongside their state pension, including Australia, the Netherlands and Denmark.
The path to adequacy, sustainability and fairness here lies in maintaining the state pension at least at its existing level, improving welfare for the over-65s in poverty and, above all, in increasing the amount of our income we invest in our workplace and voluntary pension savings.