Britain is the fourth richest country in the world, but it seems the only way it can afford its pensions bill is to raise the retirement age to 67. Nick Morrison looks at why it means only the less well-off will end up working longer.

MORE than one million pensioners are officially living in poverty, a single pensioner gets just £80 a week and it was only a few years ago that the Government increased the state pension by just 70p a week. Yet, this may come to be seen as a golden age for pensioners.

While it's probably no surprise that today's pensioners are undoubtedly better off than their parents and grandparents, what may be more unsettling is that they will probably enjoy a more comfortable retirement than their children and grandchildren.

The pensions black hole is widely acknowledged as one of the most pressing issues facing the Government. So pressing, that ministers have been putting off taking what will only be difficult decisions for as long as possible.

The problem is that we are not saving enough. According to the Pensions Commission, 12 million people aged over 25 are not making adequate provision for their retirement. The result is that if nothing is done, by 2050 the state pension will be worth less than ten per cent of average earnings.

It's a combination of demographics and bad management. Because we're all living longer, we draw a pension for longer. In 1981, a 60-year-old man could expect to live another 16.3 years on average, a woman another 20 years. By 2003, that had increased to 20.1 years for a man and 23.3 years for a woman.

On top of this, falling birth rates mean there will be fewer people of working age. Instead of three-and-a-half workers for every pensioner, by 2050 there will be fewer than two-and-a-half.

The other side is that some employers have been playing fast and loose with their pension schemes. During the Stock Market boom of the early 1990s, many companies took a holiday from their pension contributions. The result is they are now having to close the more generous final salary schemes, leaving employees at the mercy of the Stock Market to determine if their retirement is something to wish for or to dread.

The solution, according to the Pensions Commission, is to increase the state pension age to 67. According to a report in the Financial Times yesterday, the Government-appointed Commission sees this as the most acceptable option. Increasing the age at which the state pension can be claimed, allied to a new national savings plan in which individuals will be automatically enrolled, will both avert the looming crisis, and enable the pension to rise from £82.05 a week to around £109.

And while it was only this summer that ministers were insisting they had no plans to raise the state retirement age, this is likely to go down better than the alternative of a hike in taxes.

But while a state pension age of 67 will make a difference, it will be to the wrong people, according to Sue Ward, Newcastle-based pensions advisor and author of Age Concern's annual guide to pensions. "People with a reasonable amount of money would retire when they want, people who haven't will have to wait for the state pension," she says.

"And it is the people without money who also have the shortest life expectancy. This is a very, very inegalitarian proposal."

But it is not a straightforward choice between a higher pension age and higher taxes, she says. Instead, the Government should be doing more to get more people into work, especially those in their 50s and those on incapacity benefits.

Here, the regional divide is partly at fault. If there was the same level of employment in the North of England as in the South, then the ratio between dependants and non-dependants would be at a manageable level, she says.

"A lot of this is about how many people there are in work to support the people in retirement. There are vast numbers of people in their 50s who are out of work but who could be doing jobs if the right sort of jobs were available.

"There are an awful lot of people on incapacity benefit - they're not swinging the lead, but with support they could get jobs," she says.

In its submission to the Pension Commission, the TUC argued against raising the retirement age, which is already being increased for women from 60 to 65 over the next 15 years. Peter O'Brien, policy officer for the Northern TUC, says they believe it would be unfair on the poorest members of the workforce.

"The impact of a higher retirement age is felt more acutely among lower earners. They will have to work longer in more physically demanding jobs, and they might not see any form of state pension," he says.

The TUC believes more should be done to remove barriers to people working beyond 65 if they want, and creating jobs for more people of working age. "Employers are saying there are some severe skill shortages, so why are we not addressing those," Mr O'Brien adds. "There are much more positive measures we could take to address this issue.

"The Government has got to bite the bullet and take some difficult decisions to find some solutions to a crisis that is on us now."

Increasing the state pension age to 67 would also widen the divide between public and private sector workers, according to Don Robson, pensions director at Newcastle analysts Wise Speke. After deferring a decision until after the election, the Government caved in to union demands not to raise the pensionable age for civil servants from 60 to 65.

While private sector workers will have to work until they are 67 before they get a state pension, civil servants will be able to retire at 60, thanks to the generosity of tax payers.

"A lot of people are going to be very unhappy about paying for that through increased income tax, national insurance and council tax. There will be a hue and cry from the private sector," he says. He warns that even if the pension age is raised to 67, it is unlikely to be enough on its own, and raises the prospect of a further rise being necessary in the future.

"If life expectancy continues to improve then I believe 67 will be a stepping stone to 70," he says. "It is a thorny problem, and it is difficult for whoever is in power, but however they address it, it is going to be unpopular with some."

It's now almost 100 years since Lloyd George inaugurated the welfare state with the introduction of the old age pension. But while living conditions today may be unrecognisable to the first recipients, not since then has the outlook for the pensioners of the future been as uncertain as it is today.

"We are one of the richest countries in the world. It is not necessary to force the poorer people to work longer," says Sue Ward. "We do have the money to go around, it is just a question of how you spread it out."