The latest data from the Office for National Statistics has confirmed what many of us in the City have suspected for years. Gen Z is quietly making their own retirement plans, and they do not include the state pension. The Treasury is now waking up to a crisis of epic proportions. A report leaked from Whitehall suggests that nearly 40 per cent of 18-to-25-year-olds have already abandoned any expectation of drawing a state pension, preferring to rely on private investments, cryptocurrency, or simply working until they drop.
This is a market failure in the making. The state pension is a Ponzi scheme that only works if the next generation believes it will be there. Once that belief evaporates, the entire edifice crumbles. We have seen this before. In the 1970s, inflation destroyed the value of savings. In the 2000s, the dot-com bubble burst. But this is different. This is a structural shift in the social contract.
The Chancellor is now faced with a simple choice. Either reform the system radically, or watch the young abandon it completely. The current trajectory is unsustainable. With gilt yields at multi-decade highs and the public debt to GDP ratio approaching 100 per cent, the government has no room to manoeuvre. The only option is to raise the retirement age to 70 or even 75, and means-test the pension ruthlessly.
But the damage may already be done. Capital flight is not just about money. It is about trust. When the young no longer believe the state will look after them in old age, they stop paying into the system. They move their savings offshore. They buy bitcoin. They invest in property abroad. The result is a self-fulfilling prophecy. The state pension becomes even more unaffordable, and the cycle accelerates.
We have seen this before in the Eurozone periphery. Greece and Italy both experienced a collapse in pension contributions as the young emigrated. The UK is not there yet, but the signs are clear. The latest figures show that net migration of under-30s has turned negative for the first time since the financial crisis. These are the people who would have paid for our pensions.
The Treasury response has been predictable. Alarmist press releases, calls for a ‘national conversation’, and the usual platitudes about intergenerational fairness. But the market has already priced in the risk. Long-dated gilts are underperforming. The yield curve is steepening. Investors are demanding a premium for holding UK debt. This is the bond market’s way of saying that the fiscal arithmetic does not add up.
What can be done? First, stop pretending that the state pension is a promise that cannot be broken. It is a government benefit and it can be reformed. Second, encourage private pension saving with automatic enrolment and tax incentives. Third, allow the young to opt out of the state pension in exchange for a tax cut, as was done in Chile. Radical, yes. But the status quo is worse.
The clock is ticking. Every month that passes, another cohort of Gen Z loses faith in the system. The Treasury can either act now, or watch the crisis deepen. In the City, we have a saying: a problem delayed is a problem compounded. The time for action is now.
