A recommendation: I have recently come across a Substack written by Aurelien – aurelien.substack.com - which focuses on foreign policy and related matters from the perspective of someone who has been there and done that. His cynicism – or is realism a better term? – is somewhat deeper than mine, but as some of his posts explain it is important not to mistake media commentary for any real knowledge. What his articles highlight are: (a) the chaos and isolation that is characteristic of policymaking in Washington, and (b) the huge gap in understanding between liberal European polities and the rest of the world.
One of the failures of Brexit is that the UK bureaucracy has learned little or nothing about the ways in which the rest of the world see the self-absorption and inevitable decline of European elites. The primary benefit of Brexit should have been a pivot to deal with the rest of the world as it is rather than as European politicians and bureaucrats want it to be. The British elite has forgotten why a small island on the edge of Eurasian continent became a world power over roughly 120 years from 1690, while its neighbours were preoccupied with their internal demons.
For 5,000 years the fate of humanity has primarily been driven by polities on the great Eurasian land mass extended to include the Middle East and the Indian sub-continent. Over the last two centuries the American land mass has become an alternative source of power, and the same may be true of Africa in future. Still, those of us who live on the edges of those land masses – not just the UK but Japan and many other peripheral islands – must deal with that harsh economic and political reality. The period of temporary reversal, due largely to a burst of technological and economic innovation, is ending. The refusal to recognise that transition is a comforting element in the Europe’s self-delusion. Unfortunately, it does nothing to prepare us for the world as it will be in 2100 and beyond. But, now for today’s discussion.
The online version of The Spectator published an article on 19th August 2025 by its in-house provocateur, James Kirkup. His central argument rests on the claim that the state pension is a “benefit” rather than an “entitlement reflecting national insurance contributions”. Clearly, this is in the spirit of Humpty Dumpty in Lewis Carroll’s Through the Looking Glass who said: “When I use a word, it means just what I choose it to mean — neither more nor less”. However, many of us prefer that the meanings of words are sufficiently stable that we can have a useful discussion based on them.
For this purpose, there is a lengthy history of what is usually called social insurance, of which state pensions are one element, that precedes the introduction of the contributory state pension in the UK in 1925. It is usually agreed that the world’s oldest state pension was introduced by Otto von Bismark in the 1880s to address trade union discontent prompted by the rapid industrial growth of Germany in the late 19th century. This was part of a larger social insurance scheme that covered both old age and disability.
Early social insurance schemes did not cover the full population, but they were clearly seen as insurance entitlements based on contributions. They were, in modern parlance, a form of deferred compensation under which the contributions were notionally determined by actuarial calculations of the cost of funding the benefits paid.
Mr. Kirkup’s claim that the state pension is a benefit rather than a social insurance payment rests on two main arguments. The first is that the UK, like most countries, operates both the state pension scheme – and other occupational pension schemes for public employees – on a pay-as-you-go basis. The second is that the life expectancy of beneficiaries is now much greater than when they were contributing to the scheme via National Insurance. In his view, the latter implies that the state retirement age – i.e. the age at which people can begin to draw their standard or unadjusted pension – should vary according to their life expectancy.
This is the kind of argument that may make superficial sense in the world of Westminster think-tanks but doesn’t stand up to any serious economic or actuarial analysis. Consider the issue of pay-as-you-go financing. Of course, this doesn’t work for a private occupational pension scheme, because companies have no long-term guarantee of existence or size. However, countries are different. The core logic behind pay-as-you-go financing is that under reasonable assumptions it is, in fiscal and economic terms, equivalent to an investment fund that holds assets whose return is equal to the growth in national income.
Mr. Kirkup has also criticised the “triple lock” promise concerning the state pension. This is not as foolish in economic terms as is usually assumed, if we think of the state pension as being linked to growth in national income. The combination of whichever is the greater of inflation or 2.5% per year is a simple matter of insurance for periods when either inflation or economic growth departs by a large margin from historical patterns. The reason why this insurance appears to be expensive in the 2020s is the utter mess made by the previous government in managing the economic costs of the pandemic and its aftermath. This has been reinforced by the dismal growth in labour and total factor productivity since 2010.
The second part of the triple lock story is the link to average wages. The share of labour income in GDP fell over the long run from a peak of 72% in 1955 to a low of 54% in 1996. It has recovered slightly to 60% in 2024. Hence, if a pension fund were to earn a return equal to the growth in GDP, one would expect the average pension to have grown significantly faster than wages over the last 70 years.
The reasonable objection to the triple lock is simply that it is an arbitrary political decision. While it is possible to justify components of the policy, the combination doesn’t fit into any coherent story about how the state pension should be viewed. Either a link to the growth in the average/median wage or one to the growth of nominal GDP would make sense, though according to different versions of how the benefits of economic growth should be distributed.
However, focusing the triple lock as the source of the UK’s fiscal problems is a pure distraction. It cannot be repeated frequently enough that the UK’s key economic problem is the failure to achieve a sustained growth in labour productivity over what is likely to be more than two decades. This is not a party-political issue but reflects the incompetence of the British state and the ways in which it has focused on the management of failure since 2005.
The second argument made by Mr. Kirkup – the increase in life expectancy - is equal but more subtle nonsense. It is instructive to think of the modern welfare state as a huge insurance company, because that has become the primary function of European states. How does a life insurance company deal with longevity risk? If it sells policies that pay out on the death of the insured person, then longer than forecast longevity means higher returns. On the other hand, if it has sold that person an annuity, then the return on the policy will be lower. The classic method of hedging risks is, therefore, to sell both policies that pay out on death and annuities.
This lesson can be extended to social insurance if we recognize that social insurance covers not only pension and disability insurance but also healthcare costs. One of the realities of health insurance is that, on average, expenditure on healthcare during the last year or two years of life (including social care) is a high proportion of lifetime expenditures. So, while health insurance is not as good a risk match for pension annuities as classic life insurance, it does mitigate the impact of an increase in life expectancy in actuarial terms.
In addition, the impact of the increase in life expectancy on social insurance costs and revenues is more complex than Mr. Kirkup discusses. Average life expectancy at age 65 has increased from about 13 years in 1950 to about 16 years in 1990 to about 20 years in 2025. The gap between life expectancy for men and women at age 65 grew from 2.6 years in 1951 to 3.8 years in 1991 and then fell to 2.5 years in 2025. The combined effects of (a) the phase-out of the differential state retirement ages for men and women, (b) the increase in the standard retirement age to 67 from 2026 onwards, and (c) the increase in female labour participation rates have fully offset the increase in life expectancy at age 65 since 1990.
If the argument is that the state pension has shifted from being appropriately funded in 1950 to not being fully funded in 2025, the logic of increases in life expectancy mean that the change must have occurred before 1990. In any case the argument assumes that the ratio of social insurance contributions to the average state pension has remained constant. This brings an even messier question to the table: how do we fund the costs of social insurance?
The simplest version is that National Insurance Contributions (NICs) cover the state pension plus unemployment and disability insurance. In nominal terms revenue from NICs increased from £35 billion in 1990-91 to £178 billion in 2022-23.[1] Total spending on social security increased from £58 billion to £257 billion over the same period, while spending on social security for pensioners increased from £33 billion to £138 billion.
On these figures there has been a clear increase in funding coverage since 1990-91. NICs covered 106% of social security spending for pensioners in 1990-91 and 129% in 2022-23. Along with that shift has been a smaller change in the share of total social security spending on non-pensioners from 43% in 1990-91 to 46% in 2022-23.
Even going back to 1960-61 (figures on social security spending are not available for 1950-51) NICs have never covered total spending on social security. In 1960-61 NICs covered 64% of social security spending and that share increased to 69% in 2022-23. Since 2022-23 there has been a large increase in total public spending on social security – to a forecast of £316 billion in 2025-26. The increase in NIC rates implemented in April 2025 will mean that the revenue from NICs in 2025-26 is forecast to be 63% of social security spending and 114% of social security spending on pensioners.
Mr. Kirkup is correct to highlight the extent to which the UK is in a fiscal mess. The recent increase in employer NIC rates appears to have had a significant negative impact on employment, so any further increase will worsen the situation. The NIC rates paid by workers will have to increase to maintain the historic ratio between revenue from NICs and spending on social security for pensioners.
However, the bigger problem is elsewhere. It is how to fund the increase in social security spending on non-pensioners. This is forecast to be £141 billion in 2025-26, up from £23 billion in 1990-91 – an increase from 3.4% of GDP in 1990 to an estimated 5.3% of GDP in 2025. Increasing the state retirement age more quickly or adopting a variable retirement age won’t achieve very much in terms of the financing of social security spending on pensioners but it will certainly accelerate the increase in spending on social security for non-pensioners. That is, I assume, not the intention of Mr. Kirkup’s provocation.
Looking at social insurance other than pensions, there is a separate and even more difficult issue concerning the best way to fund public spending on healthcare. In 1990-91 this accounted for 48% of the receipts from income taxation. By 2022-23 that share had increased to 86%. The shares are similar when healthcare spending is divided by total revenue from consumption taxes (VAT, customs duties, stamp duty, etc).
Since income tax has become more progressive as the tax threshold has been increased in real terms, attempts to raise more revenue to cover the growth in healthcare spending will provoke ever larger behavioural changes. Alternatively, the general rate of VAT could be increased but 25% is the practical maximum. On very optimistic assumptions, the revenue from VAT with a standard rate of 25% might just have covered healthcare spending in 2022-23 but that would leave little or no headroom for further real growth in healthcare spending.
In summary, Mr. Kirkup’s provocation of a variable retirement age is a distraction. It would contribute little to managing the fiscal crunch that the UK faces over the next decade while clearly breaking the social compact concerning state pensions. It may be necessary to break that social compact but for social insurance rather than just pension policy. If that is to happen, then it should be to achieve a sustainable long-term balance between public spending and revenues. A variable retirement age is just a gimmick, not a solution.
[1] The figures cited here are taken from the OBR’s historical public finances database published in 2023.
The basic metrics on Europe suggest it is now decline relative to the rest of the world. In politics and the media critical analysis that I remember from decades ago has been for the most part replaced by select disjointed facts barely held in a string bag of political theories bearing little resemblance to reality.
Your pension and social security analysis today is excellent. This clearly places the relative costs of spending and the social compact in a realistic light. I remember the talks by Hans Rosling two decade ago on social security spending and its inexorable growth as a proportion of GDP. What we see now in the UK (and may be in Europe as a while) looks like a desperate attempt to keep spending on none essential political projects while jettisoning the spending on essentials of the social compact. Looking at the borrowing, spending and the media noise it looks like we are nearing a point of some sort of reckoning in politics as the money runs out.
An excellent article. James Kirkup needs not only to read this, but also to understand it and its implications. I doubt he will manage either.