The UK State Pension to Run Out by 2032: Retirement Crisis for Gen X and Millennials

Introduction

21st-century human beings are enjoying a longer life expectancy than their counterparts in previous years. Modern people are healthier, stronger, and more likely to live to 100 years old.

The downside to this encouraging trend is that there will be more years in which living expenses will have to be at the forefront of people’s minds. Living longer entails meeting basic needs such as housing, food, and clothing. The funds for these items usually come from a person’s pension, personal savings, or a combination of the two.

As people are bound to enjoy longer lives, there will be an effect on public spending. More people will be eligible for government assistance in the form of national pensions. The UK’s State Pension Scheme, for example, renders aid to 12.6 million people of retirement age across the country.

However, since the population is growing increasingly grey and the national birth rate is declining, living longer means working for longer and possibly retiring at a much later stage than the government-approved age of 66. The strain on national funding for pensions is palpable. A future crisis could result from this, negatively affecting people who are likely to retire anytime between 2030 and 2070.

Contemporary Retirement Landscape

Good pension schemes reflect a nation’s social health and willingness to care for its more senior citizens. A country’s pension budget should go hand-in-hand with a financially literate populace that regularly uses pension accounts.

A survey analysis by Blacktower Financial Management involving 33 countries found that Finland is most adept at mobilizing its citizens to take advantage of pension funds. At least 89.8% of people living and working there make good use of pension accounts. The Finnish Government is highly committed to rendering retirement assistance, having significant chunks of the national budget dedicated to state pensions.

At the other end of the spectrum lies the UK, which ranks very low where pension expenditure and having an agreeable retirement age are concerned. The Government spends a paltry 7.7% of the national GDP on State Pensions. That statistic translates to roughly 38% of the income an individual receives before retirement. According to the OECD, a more acceptable figure would be the equivalent of 70% of an individual’s pre-retirement income. In this way, there is a measure of security and assurance that the quality of life in retirement will closely match the quality of life before retirement. The Pension Commission echoes this recommendation. It defines a happy retirement as one where at least two-thirds of an individual’s salary is readily available in their twilight years.

The UK, however, falls far short of this percentage and is even below the global average of 63% pre-retirement income. Additionally, the working individual’s pension return has drastically declined from historical levels. Now, any employee has to contribute a whopping 50% of their salary if they wish to retire comfortably. It is not helpful either that Defined Benefit Pension schemes have fallen out of favour to be replaced by Defined Contributions Pension schemes. The latter relies more on the behaviour of the stock exchange, which does not instill a lot of confidence.

All this is somewhat troubling as, according to official projections, by the year 2066, just over a quarter of the British population will reach retirement age. This is a higher projection than in previous years. An ageing population coupled with fewer people entering the job market due to a declining birth rate is a reason to be concerned. The British Government will have to make drastic adjustments to ensure its citizens’ dignity in their retirement years.

Higher Life Expectancy Drives Pending Pension Crisis

More people are living to the ripe old ages of 90, 100, and even 110. The burden of maintaining their wellbeing falls on employed people whose taxes have to provide for an ever-increasing number of retirees.

When the UK first started using state pensions in 1948, the average individual spent roughly 25% of their life in the retirement phase. Nowadays, at least 33% of a person’s life will be spent in retirement due to higher life expectancy.

Baby Boomers are the last generation to reap the benefits of financial security, especially during retirement. Compared to that generation, Gen X, Y, and Millennials are likely to suffer the indignity of poverty when they reach retirement age.

The generations also differ in their approach to finances. While Boomers are quite financially literate, middle-aged people tend to spend more than they save which sets them up for difficulty when they eventually retire around 2035. Any working individual born in or after 1980 is in an even more dire situation. As the years go by, maintaining the quality of life during retirement is growing increasingly dear.

How to Retire Comfortably

Living longer means working longer to fund your retirement lifestyle. Government pension schemes need to reflect this fact, for example, by increasing the retirement age. Denmark has the world’s highest retirement age set at 74. Retiring at a later stage gives people enough time to accumulate sufficient funds to ensure their post-work lives are as comfortable as possible.

The World Economic Forum published a White Paper documenting the effects of increased life expectancy. One reason pensions are predicted to be in such a dire state in the future is a general reluctance to make use of saving products and pension plans. One of the best ways to develop a healthy fiscal habit is to save and invest into a pension fund. Managing your pension account can be an incredible source of confidence, enabling you to face future challenges with a brave face.

Conclusion

Though the outlook for future pensioners is dire, there are ways to navigate the situation. At the national level, pension reform is definitely in order. The issue of the decreasing return on pensions should be tabled as soon as possible. On an individual level, the populace needs to educate itself on various saving avenues and take advantage of government-sponsored pension contributions.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes