Government urged to replace state pension with compulsory DC

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The government should consider scrapping the state pension to avoid national debt reaching unmanageable levels, argues a think tank.

Defusing the debt time bomb, published by the Institute of Economic Affairs (IEA), suggests replacing it with compulsory defined contribution (DC) pensions to help to help hit a debt target of 20% of national income by 2064.

Its authors argue that government finances are on an unsustainable trajectory and that decisions taken by the current government have worsened the situation.
The abolition of contracting out and introduction of the ‘triple lock' for state pensions were singled out as "especially unhelpful" while the nationalisation of the Royal Mail Pension Plan was also highlighted.

On the other hand, the report said committing to raise the state pension age and switching to consumer prices index (CPI) linking in public sector schemes would reduce state spending as a proportion of gross domestic product (GDP) by 0.9% and 0.5% respectively.

The report states: "Even assuming that the next government delivers the deficit reduction agenda outlined by the current government through to 2018/19, our ageing population means that, on current policies, our public finances are unsustainable in the longer term."

The report says the central estimate of the Office for Budget Responsibility that 84% would be unsustainable and was, in any case based on some "heroic assumptions".

It says spending would have to be cut by 9.6% of national income - equivalent to a quarter of all government spending and half of all spending on health, social security and pensions - for the foreseeable future to reach a sustainable level of debt.

Besides the radical option of replacing the state pension with DC arrangements, the report's authors make a number of suggestions for achieving these cuts.
They call for policies to keep more over 55s in and work raise the state pension age further and for the triple lock, which increases the state pension by the highest of wage growth or CPI inflation with a 2.5% floor, to be scrapped.

The report says: "Reductions in the level of the state pension (especially from the government's proposed level of the flat-rate pension to be introduced in 2016) would also be welcome. Particularly helpful in the long term would be a commitment to link increases in the state pension only to increases in prices."