Pensions in an Independent Scotland: Part 1

James Copland of Dumfries and Gareth Campbell are looking for some clarity on pensions, particularly on retirement age. This is an issue that is covered to some extent by the White Paper, "Scotland's Future" but there is an admission therein that more information is required.

The passage in question pp141-142 reads thus:

The State Pension Age for women across the UK is in the process of increasing from 60 to 65 between 2010 and 2018. An increase to 66 for both men and women is to be fully implemented by October 2020. A further phased increase in the State Pension Age to 67 is planned between 2026 and 2028.

The Scottish Government accepts that the State Pension Age should rise to 66 in line with the existing timetable. The rapid move to 67 is a concern, however, as it is a significantly faster timetable than that announced by the previous Westminster government. Lower average life expectancy in Scotland compared to the UK means that Scots currently enjoy fewer years in receipt of the State Pensions.

In an independent Scotland, this Scottish Government will reserve judgement on the increase to 67 between 2026 and 2028. We propose that an Independent Commission on the State Pension Age is established and tasked with considering the appropriate rate of increase of the State Pension Age for Scotland over the long term. This Government plans that the Commission will report to parliament within the first two years of independence with a view to its recommendations being implemented promptly thereafter.

So that is all relatively clear although not ground-breaking. However there is a tacit understanding that Scotland is different to the UK as a whole. That being said, the range of pensionable ages across the EU in particular vary widely from as low as 59 for women in Romania to as high as 68 for both men and women in Finland in some (but not all) circumstances.

There has been a great deal made of Scotland aspiring towards the types of society demonstrated by Scandinavia with social justice and equality as honourable aims. However we need to reflect that in all the Nordic countries there is equality in pensionable age – in Denmark, Finland, Iceland, Norway, and Sweden men and women retire at the same ages. We would tend towards agreement with such a policy as women do tend to live longer than men anyway. Let’s forget that in many cases women in general have shorter working lives anyway due to pregnancy, childbirth, childcare etc. That is not a relevant argument to affect pension as without new population in society there is nobody to pay tomorrow’s taxes that will be paid out as pensions – women should not be punished for, in effect, safeguarding the whole system. Nevertheless there are fewer arguments today for a lower pensionable age for women compared to 50 or 60 years ago – the fundamental gender roles in society have altered hugely over that period. So no further gender discrimination in pensionable age in an independent Scotland.

Where we would see some flexibility in pensionable age is when it is related to the type of job undertaken. Should a foundry worker in a manual role be expected to work to the same age as a wages clerk? Should a scaffolder continue in his labour for the same number of years as a receptionist? The answer here is probably "no." We are all individuals but there has to be some element of “one size fits all” in arrangements for pensions. One proposal might be a sliding scale of retirement ages from 62 to 68 for instance with types of employment categorised within that range. In principle those with a physically demanding job would be able to retire at 62 with a full State Pension and those with the lightest jobs at 68. There would probably have to be provision that those in the less physically demanding jobs would be able to retire at 62 but then they would receive a slightly lower pension. Checks and balances would be needed of course as who is to say that some less physically demanding jobs are not highly stressful and, in effect, equally as punishing on the health as physical outdoors work. But this has been achieved elsewhere so why not here? The ability of a small country to be more flexible can be well demonstrated here as it would be a far simpler exercise to introduce in a country of around 5 million inhabitants than in a country of 60 million.

Deferment of pension is something that is encouraged by the UK government. In essence you work a few more years and see a rise in you State Pension to reflect those extra worked years. This is particularly common among women who remain in work so as to retire at the same time as their husbands.

However we can flatly denounce this scheme as entirely flawed. We didn’t work this one out ourselves. Instead we left this to the sharp numerate mind of a one-time highly trusted employee of David Cameron’s own father in his stockbroking business. No names, no pack drill here as you might well understand. She was asked by a friend what the benefit might be in deferring taking her pension at 65 instead of 60? Initially the face value difference in State Pension payment looked reasonable but upon doing some number crunching the stark truth was revealed – to just break even the woman in question would have to live to 93 years of age!

Let’s explain that. By working to 65 she would receive a larger pension – about that there is no doubt – but in doing so she would forego receiving her pension from age 60 up to her 65^th birthday. It would then take 28 years of enhanced pension payments to make up for those foregone 5 years! The World Health Organisation estimates female life expectancy in the UK at 82.5 years and the UN Department of Economic and Social Affairs offers the figure of 81.7 years so at the very best analysis a woman deferring her pension to 65 will have to live at least 10.5 years beyond UK life expectancy to just break even in her pension.

Let’s combine the concept of a sliding scale in pensionable age based on employment type and consider deferment. We would propose that any person who wishes to work beyond their statutory retirement age and continue to make contributions to their State Pension should be rewarded with an enhanced pension. However this enhanced pension must not be an arbitrary figure tossed down as government policy. Instead the enhanced pension must be calculated on a case-by-case basis with an established monthly enhancement rate so that the person working beyond statutory retirement can calculate his or her own gain. 

Working for one, two, three, four or five years beyond statutory retirement should be rewarded in a very simple and transparent manner – if the person chooses to work for exactly 5 years beyond retirement date then the enhanced pension should break even exactly 5 years from the new date of retirement; if the person works 3.7 years beyond actual retirement then their pension should break even exactly 3.7 years beyond actual retirement. In that manner the retiree can be reasonably expected to reap the reward from working longer by surviving long enough to see a profit from their choice. 

This is not advanced mathematics. This is pretty much common sense...

Any and all original ideas stated here are those of the Scottish Economic Analysis Unit and do not knowingly reflect the policies of the Scottish Government or any political party or trade union.