National insurance contributions will need to rise by 5 per cent to sustain the state pension, the government's own analysts have warned.
According to the Government Actuary’s Department (GAD), the national insurance fund – which pays the state pension and other social benefits – will run out of money around 2032.
This analysis also showed that state pension benefits are responsible for over 90 per cent of the expenditure from the fund.
“Therefore, the long-term finances of the fund will be significantly affected by the level of state pension benefits paid out in future,” the research said.
To maintain the current level of benefits, national insurance contributions would need to rise, the GAD warned.
Another option is for Parliament to approve a Treasury grant, but these would not be sufficient to prevent the fund from running out.
According to Tom Selby, senior analyst at AJ Bell, these Treasury grants would “kick in at £11.6bn a year in 2030 and increase rapidly to £151bn by 2060, and £482bn by 2080, if the system stays as it is”.
He said: “The options open to policymakers to plug the funding gap are not attractive.”
Former pensions minister baroness Ros Altmann told FTAdviser that this report “highlights again the coming costs of our aging population, as the baby-boomers head for longer retirements”.
She said: “The new state pension system, which will pay less state pension to most people from the 2030s onwards, was supposed to ensure the costs of paying state pensions were sustainable in the long term.
“This new report suggests that after the 2030s, the costs of paying state pensions will exceed the current allowed Treasury spending limit.”
In April 2016 the government changed state pension rules so that eligibility became based on national insurance contributions.
In order to receive the full £155.65 per week individuals would need to have paid national insurance for at least 35 years.
She added: “What is even more concerning is that the cost of the increasing numbers of older citizens is about much more than just the state pension.
“Private pensions will be less generous in future and the costs of social care have not been factored in anywhere. The state will need to address this care crisis urgently, as paying for care requires much larger sums than a basic pension income.”
According to Steven Cameron, pensions director at Aegon, for many people, “the state pension continues to be a core part of their total income in retirement and something they rely on”.
He said: “While governments may be tempted to focus on the issues they face in the short term, for something like state pensions, they need to think much further ahead.
“Projections such as this from the GAD need careful consideration by the government to make sure state pensions remain affordable not just now but over the long term.”
The poorest pensioners are relying on the state pension for three quarters (78 per cent) of their income, according to research from the Pensions Policy Institute (PPI) published today (10 January).
The analysis, sponsored by Age UK and based on data from The English Longitudinal Study of Ageing (ELSA), which has been following households aged 50 plus every two years over the period 2002 to 2015, also showed the dependency increases to 86 per cent when state benefits are included.
According to the report, the state pension is an important part of retirement income for all savers, except for the lucky few with the greatest retirement incomes.
For Nathan Long, senior pension analyst at Hargreaves Lansdown, “the perilous funding position of the state pension reconfirms why the recent acceleration of the state pension age was required”.
He said: “A bump in national insurance contributions will be tough for many households to cope with, as pay packets are already stretched and will become increasingly so with the full roll out of auto-enrolment.
“Questions around the level of national insurance paid by the self-employed will surely resurface, even though any changes remain politically sensitive.”
The government announced in July that the state pension age increase should be brought forward to 68 between 2037 and 2039, due to increases in life expectancy.
Under the current law, the state pension age is due to increase to 68 between 2044 and 2046.
The change to the state pension age will leave 7.6 million people £10,000 worse off, according to analysis by the House of Commons Library.
From next April, the rate of the state pension for new pensioners will rise in line with inflation by £4.80 from £159.55 to £164.35 per week.
maria.espadinha@ft.com
