Pressure is building on the UK\u2019s state pension, and most people know it. Something has to give. The uncomfortable question is what. There are about 278 pensioners for every 1,000 working-age people in the UK. That\u2019s a ratio of just 3.6: 1. Back in 1948 when the basic state pension was introduced there were about five workers for every pensioner.<\/p>\n
In simple terms, there are fewer workers supporting more pensioners, and for much longer. As life expectancies increase, the cost of funding the state pension is only going one way: up.<\/p>\n
Retirement is now expected to last close to three decades for many people. It\u2019s no surprise that younger and middle-aged workers worry about whether the system will still work by the time they get there, while older workers wonder whether the rules will change just as they reach the finish line with fear.<\/p>\n
That\u2019s why one idea keeps resurfacing, usually whispered rather than shouted: should the UK be means-testing the state pension?<\/p>\n
When it comes up, the reaction from people approaching retirement is immediate and emotional. \u201cNo. I\u2019ve paid in all my life. It\u2019s my right. I was promised this.\u201d<\/p>\n
So means-testing the state pension feels like having the rug pulled out from under you. But despite how unpopular the idea is, it refuses to go away. And that\u2019s because the pressure on the system really is building.<\/p>\n
\u2022 The exact year that the triple lock will bankrupt the state pension<\/a><\/p>\n With fewer working-age people supporting more pensioners, governments are left with three choices. They can raise taxes to fund 25 to 30-year retirements for everyone. They can reduce the real value of the state pension by moving away from the triple lock. Or they can adjust the system more fundamentally, encouraging higher levels of private saving while focusing state support on those who genuinely need it.<\/p>\n Means-testing sits firmly in that third camp.<\/p>\n But if we\u2019re going to talk seriously about it, we also have to talk about how people save, what incentives are offered, and what the government wants people to do over a working lifetime to prepare for retirement.<\/p>\n In Australia, how much the state pays you in retirement is based on the value of your assets, your homeownership status and if you\u2019re in a relationship.<\/p>\n Having seen the system in action, I don\u2019t think the idea of means-testing should be dismissed. But it only works if it\u2019s part of a long-term vision.<\/p>\n Here are three lessons from Australia that the UK should take seriously.<\/p>\n Means-testing only works if people can build their savings<\/p>\n You can\u2019t means-test the state pension unless you incentivise people to save more for their retirement. Let\u2019s face it, under any sensible test today, most people in the UK would still qualify anyway. Most private pension pots are simply too small to fund a comfortable retirement on their own. <\/p>\n But if the state pension becomes more of a \u201clast resort\u201d safety net, people have to be helped to build enough private savings to stand on their own two feet.<\/p>\n The good news is the UK is already part-way there. Defined contribution pensions (where you build up a pot based on what you and your employer pay in, plus investment growth) are now the norm, and auto-enrolment is doing what it was designed to do. Unless they opt out, most workers now contribute a minimum of 5 per cent of their salary and their employers 3 per cent. People are saving something. That \u201csomething\u201d isn\u2019t enough, however.<\/p>\n In Australia, when compulsory employer pension contributions, (superannuation), were introduced in 1992, about 80 per cent of people of pension age were relying on the Age Pension, despite it being means-tested. The response wasn\u2019t to cut support, but to increase national saving gradually. Minimum contributions started small and were increased over time. They\u2019re now 12 per cent, and tax breaks are given to incentivise employees to pay in extra.<\/p>\n