Work longer, save, pay more tax or stay poor

Something has to give. And that something is you. That was the stark message yesterday from the interim report of the commission into Britain's pensions system headed by the former CBI leader, Adair Turner. The system is in need of urgent repair if it is to avoid a serious malfunction in 15 or 20 years' time and the solution is a combination of working longer, saving more or paying higher taxes. The only other alternative is to have a long but poorer old age.

Despite its 300 pages, the broad thrust of the report is simple. We are living longer than Beveridge envisaged when he laid the foundations of the modern welfare state in the 1940s and that means our pensions have to go further.

By 2050, the cost could become prohibitive even on the government's rather conservative estimate that the postwar trend towards ever longer lives will flatten out. Mr Turner thinks that future expectations of life expectancy are too pessimistic. If the trends of the past 20 years continue, a male aged 65 could expect to survive into his early 90s.

Increased life expectancy has not been matched by an increase in financial resources to pay pensions. Misguided policies by both Labour and Conservative governments, pension holidays granted to themselves by companies and the trend towards early retirement has meant that not enough money is going into schemes to guarantee those who will retire in 15-25 years time an old age free from financial worry.

Gordon Brown's scrapping of the dividend tax credit in 1997 was part of a series of measures that went back to the 1980s in which people were "fooled into irrational exuberance and overestimated the resilience of defined benefit schemes".

For large chunks of the population - broadly definable as the middle classes working in the private sector - big problems are looming. Mr Turner estimates that 12 million people are not saving enough. Of the 12 million, 60% are not contributing to a private pension at all.

When Labour came to power in 1997 it picked out particular groups for special attention, in particular the 5 million pensioners it considered to be living in poverty, many of them women who received a fraction of the state pension. Targeted support or means testing has helped those on the lowest incomes.

Likewise, for the rich the problem is not acute. At the top of the income scale, senior executives enjoy contribution rates into pension schemes sometimes twice as high as those enjoyed by the rest of the workforce. And public sector workers on final salary pensions - where the payout is linked to the number of years worked rather than by the performance of the stock market - have accumulated pension rights roughly twice those of private sector employees.

In the past, governments have sought to muddle through. Labour has attempted to foster private pension saving through stakeholder pensions, essentially cheap personal pensions often run by employers, but a combination of the pensions misselling crisis and general lack of trust in the insurance industry was compounded by the stock market crash of 2000.

Even relatively safe final salary schemes became less popular. In 1995 there were about 5.2 million active members of final salary schemes, yet by 2000 this figure had fallen to about 4.6 million.

Mr Turner says millions of low and middle income earners will plan to retire at 65 only to find their pension pots will fund a low income.

He does not see the boom in house prices as a "magic bullet", with people unlocking wealth stored up in their property to fund their retirement. He concludes that while this might prove possible for some people, trading down to a smaller property will release only a small sum for most people and would prove inadequate should they want to use it to fund their retirement.

The report says it is time to think more strategically. Society could accept that pensioners in the future are going to be poorer relative to non-pensioners than are those today, but opinion polls suggest that is an unpalatable option. If so, we can work longer so that we build up bigger pension pots and spend them over a shorter length of time before we die, we can save more ourselves or we can have the government save more on our behalf.

None of the options is especially tempting. Mr Turner estimates that if the whole burden were to fall on longer working lives, we would all have our noses to the grindstone for an extra seven years, with the average retirement age rising to just shy of 70.

If, on the other hand, we want pensioners to be on average as well off as today, but keep retirement ages unchanged, the percentage of GDP transferred to normal retirement age pensioners would have to rise from 9.9% today to 17.5% in 2050.

Saving more ourselves means we consume less now, while getting the government to foot the bill through a higher state pension would eventually require such a big increase in taxation - the £57bn figure widely reported ahead of the report's release - that it would kill the economy stone dead.

Mr Turner believes there has to be a mix of all three policy solutions, and clearly has doubts about whether the additional saving he envisages as part of the package can be achieved voluntarily.

But compelling people to save is tough for the government to sell to a sceptical public, as of course will be the idea of headlines suggesting Britons will be forced to work till they drop or that they are going to have to pay tens of billions more in taxes. It is fortunate, then, that Mr Turner's final recommendations will not be published until next autumn, when the election will probably already have been fought.