Pension mathematics - Why can't I make this add up?
It’s election season in the UK - also known as silly season. We even have a party called the Monster Raving Loony Party that is pushing for “All political and electoral leaflets will be printed on soft paper so that it may be recycled in the appropriate manner” [1].
There are more than a few eye grabbing headlines about the UK state pension - so I thought I would dig quickly into whether these political promises are affordable by looking at how much the average person contributes in tax and comparing this to how much the average person draws from the state pension.
In the UK you get a state pension from age 66… and if you use the UK Office of National Statistics life expectancy calculator [2] you can work out how long you will enjoy this pension. If you are lucky enough to be 66 in the UK then on average you are expected to live until 85 if you are male and 87 if you are female. So would draw a pension for 19 years if you are male - drawing a total of ￡218,545 at ￡221.20 per week for 988 weeks. For women you would draw a total of ￡241,550.
So how much do people contribute in tax - well the median annual earnings for full time employees was ￡34,963 in 2023 [3] which gives rise to a tax bill of ￡6016 [4]. This equates to about ￡300,000 of tax over a 50 year working life.
OK I get that this is a back of envelope calculation and I have not included all sorts of variables such as inflation, growth of the economy, and the likely discovery of the magic money tree, but these simple calculations imply that over 70% of all the tax contributed by the average person will be consumed by the state pension. In reality governments have to spend money on many other areas, including health, defence, roads, justice, education, as well as social security for working age people. It’s probably worse, because most folks don’t start working at age 16, and the current state pension really isn’t enough to live off.
Clearly some of my assumptions are wrong here - I just worry that we are leading people to believe that they ‘have paid their fair share’ only to find out too late that the state pension age has increased significantly and the real value of an already modest state pension is reduced significantly.
It raises three questions we often consider as we do a large amount of work looking at real world health outcomes:
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[1] For those excited by the idea that art meets life - check out the excellent blog by Tim Harford who reports how even apparently lunatic ideas are taken up by ruling political parties and put into government legislation