The state pension system is on the verge of a funding crisis as the government’s national insurance fund has drained rapidly since the financial crisis, according to Michael Johnson, research fellow of the Centre for Policy Studies.
The fund has shrunk from £53bn in 2008-09 to £29.1bn in 2012-13, and the government Actuary’s department recently forecast it will be exhausted by 2035-36, but could run out much sooner.
Mr Johnson warned that the next generation should be advised that their state pension will be derisory.
“Indeed, it would be prudent to plan around not receiving anything at all,” he added.
His report into the issue argued that the current system of national insurance contributions is not transparent, or progressive and burdens companies with its complexity.
Mr Johnson urged the government to scrap the national insurance system, replacing employee NICs and income tax on earnings with a single earnings tax, ideally set at 32 per cent, 42 per cent and 47 per cent, based upon today’s personal allowance and three marginal income tax bands.
He continued that HM Revenue and Customs should model the net effect of no longer collecting employer NIC receipts, offset by higher corporation tax, dividend tax, earnings tax and VAT receipts.
“Any projected shortfall should be made up by additional consumer taxes,” Mr Johnson added, concluding that the chancellor should use the Autumn Statement to signal his intention to end NICs and introduce an earnings tax.
peter.walker@ft.com
