There has been talk recently in the news about means testing the State Pension. This is because the costs of the State Pension will continue to grow, despite increases in State Pension age (SPa). Spending on State pension in 2024/25 is forecast to be around £137.5bn. Spending on state pensions and pensioner benefits costs around 5.5% of GDP in 2025 increasing to around 8% in 2071/72. It is important to note though that the majority of this spending increase is not a result of the triple lock, it is because we have more older people, living for longer, and fewer people having children. In particular a really large cohort, the baby boomers, are starting to reach retirement now. You can see on this snazzy chart produced by ONS, the hump in the population of people in their late 50s, 60s, and early 70s.
ONS, 2025, www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/articles/ukpopulationpyramidinteractive/2020-01-08
So, the rationale is, the State Pension costs too much, so let’s means test it so that only the people who really need it are getting access. The problem is, it really isn’t that simple. It would be a different story if people were saving a lot into their workplace or personal pensions and could on average, achieve a decent income on these, but in fact, people aged 35 to 44 today are likely to reach retirement with around £70,000 on average saved into a DC pot, and little to no DB savings.
£70k, converted into a sustainable income stream, for someone who retires at age 67 and dies at age 81 (average life expectancy for a 35 year old man in 2024) would roughly translate into an income of around £5,000 a year, in real terms. So ostensibly, the average person would need to apply for State Pension (under a means testing system) and would then lose out on some entitlement because of their pension savings. Could this result in fewer people saving into a private pension? And if it did, would that actually offset some of the predicted cost saving?
We also can’t underestimate the expenses of means testing. Introducing a means test would mean setting up a new system to check and assess income, ongoing monitoring, appeals, fraud detection and the staff and resources required to maintain the system.
There are also significant issues with take up, 37% of households eligible for Pension Credit do not receive it either because they haven’t applied or because of system failures. So means testing could increase pensioner poverty levels as well as adding an extra layer of bureaucracy and costs to the system.
Okay Pensions Goth, how do we reduce the cost of the State Pension then? Well, I wonder actually about the parameters of the argument. The fact that the cost is increasing does not automatically mean that the cost must be reduced. There are other ways of tackling the growing expenses of an ageing population, e.g., targeting tax and spending, encouraging and facilitating longer working, attracting younger immigrants etc. I am not advocating for any of these in particular, but it does seem that there may be more complex, but more sustainable, ways of managing future spending on older people.
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