As of this year the state pension will have been going for 109 years, but unless something changes the end is in sight.
What’s the problem? The primary reason is that the national insurance fund is run like a current account rather than a savings account. There are no permanently maintained savings and, much like my own current account at certain periods of the year, the money currently coming in is less than the amounts being paid out.
This is despite the fact that the UK state pension already offers the lowest replacement income relative to average earnings of any Organisation for Economic Co-operation and Development (OECD) country. The cost of providing even this level of benefits is greater than the money being collected in national insurance contributions (NICs). The resulting overdraft is currently being met by Treasury grants; however, these are limited to 17 per cent of the year’s expenditure, and even with these payments the Government Actuary’s Department (GAD) estimates that the fund will run out completely by 2032/2033.
The problem is that the money coming into the national insurance fund is paid by people who are workers and the money going out is spent on people who are not. At the present time the balance between workers and pensioners is 1,000 workers to every 310 pensioners. By 2036 however, the ratio is projected to be 360 pensioners supported by 1,000 workers. If the state pension remains the same, each worker will have to contribute more, or pensioners will receive less. The state pension is not the only benefit paid from the national insurance fund; but it accounts for 94 per cent of its expenditure and it is therefore the key driver of change.
- The cost of running the state pension is not currently sustainable
- One option is to reduce the benefit and increase national insurance payments
- Savers are encouraged to increase private pension contributions
This situation is exacerbated by the fact that the money coming in from NICs increases in line with earnings, whereas the money going out in the form of the state pension increases under the triple lock. Following a longer than expected period of low wage increases the strain on income has become even greater.
So, what are the options?
According to research carried out by Royal London in 2016 two-thirds of young people do not expect the state pension to exist by the time they come to retire anyway, so why not accept the inevitable and just let it run out?
It could not be done in the short term. Recent research commissioned by Age UK found that many pensioners, particularly in older age groups, are heavily reliant on the state pension and expect to remain so.
Even if it were considered morally acceptable, if there were no state pension, many of these individuals would find themselves in poverty and the state would be required to support them in some other way.
The result would be that current workers would still be paying their costs, but in the knowledge that they would be unlikely to receive a pension themselves at retirement. It is not a vote-winner, and as a state benefit it needs to be. It is more likely that successive governments will make gradual changes and try to keep it going in some format, which means they will either have to increase funding or reduce the benefits – or both.