More than 12 million working people are not saving enough for their retirement, a major report into pensions has found.
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The Pensions Commission said a mix of higher taxes, more saving and a higher average retirement age was needed to solve the UK's pensions crisis.
If taxes, savings or retirement ages were not increased, pensioners would suffer a 30% decline in relative incomes, the report said.
The Commission is due to set out specific recommendations next year.
The Pensions Commission was asked in 2002 to look into the state of UK retirement provision.
The UK's ageing population means that, in future years, taxpayers will have to support an increasing number of over-65s through the state pension.
Given the ageing population, the report says that society and individuals must choose a mix of four options.
These are either:
- Pensioners becoming poorer relative to the rest of society; or
- Taxes/National Insurance contributions devoted to pensions rising; or
- Savings rising; or
Average retirement ages rising.
The report says that because the option of poorer pensioners is undesirable, some combination of higher taxes, higher savings and/or a higher average retirement age is needed.
If the retirement age does not rise, state pensions spending or private savings will have to rise by £57bn a year, the report says, to keep pensioners' living standards at current levels.
However, if taxes or savings or savings remain the same, the average retirement age will have to rise to nearly 70 to maintain pensioner living standards.
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"No single solution makes sense," the report adds.
About 11.3 million workers are not making any contributions into private pension schemes, the report says.
The report also warns that unless new government initiatives can change people's behaviour, it is "unlikely" that the current state systems and private pensions will solve the pensions problem.
It says the way forward must involve some mix of:
- a major revitalisation of the voluntary (private) system
- changes to the state system
- increased levels of compulsion.
Pension report: key facts
By 2050 the average 65-year-old male will live another 27.7 years
The average male retirement age fell from 67.2 in 1950 to 63.1 in 1995, only 53% of women are employed at age 59
Private or state provision will have to rise by £57bn if the average retirement age doesn't increase
In total, 11.3 million people in work are not making contributions to any private pension scheme
Only 29% of employees of small and medium sized firms are members of an employer-sponsored scheme
Membership of final salary schemes has halved since 2000
Source: Pension Commission report
Pension Commission chairman Adair Turner said the UK's state pension system was one of the least generous in the developed world.
Also private pensions were becoming less generous as companies were unable to afford to offer final-salary or defined-benefit pension schemes.
"The long-term shift away from defined benefit to defined contribution schemes has become a flood as the fools' paradise of overvalued equity markets has come to an end," Mr Turner said.
"A major shift of risk is occurring - from the state, employers and the financial services industry, to individuals who are often ill equipped to deal with it," he added.
Mr Turner also said that not everyone could rely on the value of their house to support them in their old age.
"Housing does not provide a sufficient solution, because those who lack pensions do not have the bigger housing assets, and there are significant risks in relying on housing."
The Commission's report has been welcomed by the government and opposition parties.
Prime Minister Tony Blair's official spokesman said that the report agreed with the government's approach of looking to forge a "long term consensual approach rather than knee-jerk short term answers."
But Liberal Democrat work and pensions spokesman Steve Webb said the report indicated how successive governments had let "Middle Britain" down over pensions.
David Willetts, Conservative shadow work and pensions secretary, said the report provided a "powerful wake-up call", emphasising the need for reform of the state system and better incentives to save.
The National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI) called for reform of state retirement provision.
But Age Concern warned against any increase to the state retirement age.
"Raising the state pension age would increase inequalities and would be a huge betrayal for lower income groups," Gordon Lishman, Age Concern's director general, said.
"Average life expectancy amongst male manual workers is just 71 and many would die before reaching state pension age."