Nothing is certain 💀

People are living longer on average. That’s the good news. The Office for National Statistics (ONS) reports UK life expectancy for those born in 2022 to 2024 at 83 years for females and 79.1 years for males. But not everyone gets the same number of years in good health.

For much of the twentieth century, life looked a lot like this: a little education, a long period of work, a smattering of retirement, then death. That journey shaped everything from work to pensions to welfare.

‍Now, with longer lifespans, that timeline is on shakier ground. Retirement is less likely to be a single fixed event. Working lives see more retraining and more transitions. The period during which people might draw on pensions and public services lengthens. At the same time, the UK’s state pension system is mostly pay-as-you-go: today’s payments are funded by today’s National Insurance contributions and general taxation, not a ring-fenced fund. 

‍Britain’s pension and tax system was built for another time, and the gap between that world and this one keeps widening. It’s not simply a question of how long people live, but how many of those years are healthy and independent – healthspan. Every improvement in preventing disease and extending independence rewrites the obligations of the state and the taxpayers that support it.

Triple cooked

A Ponzi scheme relies on continuously recruiting new investors to pay earlier investors. The state pension is not that. It is ultimately backed by the state’s power to tax. But it is a system that depends on a future base of contributors being large enough, relative to recipients, to sustain the promise at the level people expect.

For most of the past 15 years, the triple lock has guaranteed the state pension rises by whichever is highest of three measures: inflation, average earnings growth, or 2.5%. It’s designed to stop pensioner incomes falling behind living costs or wages. In that respect, it’s been a phenomenal success. Pensioners are now less likely to be in relative income poverty than working-age adults with children. The problem is it ratchets pension spending higher and higher, and makes the long-term cost sensitive to shocks. The Office for Budget Responsibility (OBR) now says the triple lock, combined with an ageing population, is a major source of expenditure in its long-term fiscal projections with the state pension one of the biggest pressures after health.

‍So, why not change it if it costs so much? The Institute for Fiscal Studies (IFS) argues the triple lock should be replaced with a clearer ‘four-point guarantee’ for the state pension, including an earnings-linked target and inflation protection, in order to rein in the cost.

Yet older voters have an outsized influence on pensions policy because they turn out more reliably at elections than younger voters. The grey vote helps make the state pension and the triple lock a third rail, politically. David Willetts has described this tilt as a kind of gerontocracy, where policy naturally bends towards the interests of the older, voting-heavy parts of the population. 

In England, healthy life expectancy varies massively by socioeconomic levels. In 2020 to 2022, healthy life expectancy at birth in the most deprived areas was about 51 years, compared with about 70 years in the least deprived areas. The more affluent may therefore be overrepresented among Britain’s older cohort.

Drawdown

Longer lives also delay inheritances. The IFS modelled the age at which people are expected to experience the death of their last surviving parent. It projects the average rises across cohorts: from 58 for those born in the 1960s, to 62 for those born in the 1970s, to 64 for those born in the 1980s. It also estimates that for about a third of people born in the 1980s, this will not happen until they are at least in their 70s.

‍A wealth injection at 60 tends to arrive after many major life choices have already been made. It may land when recipients are themselves approaching later life. That interacts with housing markets, which already rely on intergenerational wealth as a hidden support for deposits and affordability. The Pensions Policy Institute has warned housing is becoming a major fault line, with more people reaching retirement still renting and less protected from rent shocks.

‍If the generational wealth transfer slows, the gap between those with family wealth and those without can widen, and tension around perceived generational fairness can kick off. And what happens if successive governments hoover up more and more of that inheritance through taxation?

Children of men

The huge spanner is the cratering fertility rate. England and Wales’ total fertility rate (TFR) was 1.41 children per woman in 2024 – the lowest on record for the third year in a row. The rate has been falling since 2010. By the way, a TFR of around 2.1 children per woman is required to maintain a stable population, often referred to as the replacement level. Depopulation, much like overpopulation, could lead to very dystopian outcomes, indeed. But that’s for another time.

‍Fertility rates are falling across the world. People, for reasons that are not entirely clear, are having children later, having fewer children overall, or deciding not to have them at all. Falling sperm counts (disputed), higher educational attainment (uneven), and difficulties in finding a suitable mate (hint: it’s the apps) do not easily explain the fact fertility rates are dropping from Angola to New Zealand. 

‍Later partnership and later parenthood – boosted by an extended adolescence – reduce the number of years in which people can have children, even if they don’t consciously decide to have a smaller family. The Organisation for Economic Co-operation and Development’s work on fertility trends links the decline to a mix of housing costs, labour market insecurity, expensive childcare and patchy parental leave. The IFS found expanding childcare support can increase mothers’ employment – and broaden the tax base. Britain has some of the highest childcare costs in the developed world. 

‍In most countries, the long-term shift has been towards two-earner households with women spending more of adulthood in education and paid employment. That is obviously a good thing with many benefits. But it also changes the timing and opportunity cost of having children. 

Grasping the nettle

Recent increases in net migration have provided the UK with some breathing room. But the state will ultimately be forced to make difficult decisions on spending, the triple lock, childcare costs or some combination of the three. Although the latest ONS estimates show a sharp fall, long-term immigration of 1,257,000 in 2022 was the highest on record. It fell slightly to an estimated 1,218,000 in 2023. In the year to mid-2024, net international migration contributed most to population growth across the UK. Oxford’s Migration Observatory estimates 65% of the increase in the UK population between 2004 and 2023 came directly from net migration, and that since 2020 almost all population growth has come from net migration. 

So, migration has been offsetting weak natural change (births minus deaths) and helping to keep the working age population larger than it would otherwise be. Immigration has been effective in mitigating a falling natural replacement rate, according to Economic Affairs Committee research. It’s why net migration has generally been higher since the late 1990s, despite election pledges to cut immigration. It seems no government has the political imagination to solve the economic problems stemming from demographic change any other way. 

But here’s the kicker. Immigration doesn’t solve the long-term problem of an ageing population. The dependency ratio problem persists and is contingent on who arrives, whether they work, and whether they stay. The fiscal picture is mixed: higher-earning, working-age migrants are typically more fiscally positive, while groups with lower earnings or with children need to earn more to be net positive once public spending is counted. There are also a whole host of externalities – housing pressures, in particular – that make the whole subject politically combustible. 

Tax fiend

The first state pension arrived with the Old Age Pensions Act 1908. It was funded from general taxation, paid from age 70, and was means-tested and conditional. After the Second World War, the system was rebuilt on a much broader, contribution-based footing as part of the new welfare state, with the basic state pension introduced in 1948 under the national insurance framework.

‍It’s a recurring pattern. Once the state gets used to the cash in its coffers, narrow and temporary has a habit of becoming broad and permanent. UK income tax was introduced in 1799 to help fund war and was framed as a short-term measure. It was later repealed and reintroduced, and has effectively been in place since 1842. In fact, Parliament has to renew the authority to collect it each year. Stamp duty began in 1694 as a time-limited war tax on documents before becoming a part of the system. VAT, introduced in 1973, has become a core broad-based consumption tax. Once something is normalised, it becomes easier to tweak than to abolish. Expect the same with the state pension. 

Getting the bill

Low fertility rates and longer lives add up to a demographic timebomb that the OBR characterises as a multi-trillion-pound ‘intergenerational budget imbalance’. Millennials have lived through their fair share of ‘once-in-a-generation’ crises, from the 2008 crash to the pandemic. Are they set to be shafted in their old age, too?

‍Expect reform, not abolition. The state pension is too big and too political. But the version millennials get won’t be the version previous generations got. Paid later, uprated less generously, clawed back through tax, narrowed through eligibility. A glacial redesign, death by a thousand cuts.