The House of Lords committee on intergenerational fairness and provision also called on the government to scrap the triple lock, to assure parity with working people.
In a 114-page long report tackling intergenerational unfairness, published today (April 25), the peers argued the reality of longer working lives should prompt the government to rethink the national insurance system.
The committee noted that it wasn't fair that only individuals under the state pension age paid this tax and said workers over the age threshold should also contribute.
Older people with lower incomes could be protected from this change by aligning the national insurance contributions threshold for this group with the income tax personal allowance, the committee added.
This recommendation is in line with some of the evidence received by the committee during its inquiry.
FTAdviser reported in November that several economists supported this move, as the current system was no longer equitable and needed reform.
Nevertheless, the government has previously dismissed this idea, saying this would pose "a real challenge" since national insurance is linked to the contributing principle.
The Lords argued that the current national insurance system worked poorly.
They said national insurance contributions did not pay for the state pension “even though they are used as a way to determine eligibility for it”.
The committee noted that “there are strong arguments for the government to consider greater alignment and the eventual merger of the national insurance contributions and income tax systems".
The Lords committee also recommended that the state pension triple lock should be scrapped.
Under the current system, the state pension increases each year in line with whichever is the highest: consumer price inflation, average earnings growth, or 2.5 per cent.
Pensions rose by 2.6 per cent in 2019/20 in line with average earnings.
The committee advocated that the state pension should be uprated in line with average earnings to “ensure parity with working people”.
But there should be protection against any unusually high periods of inflation in the future, they noted.
The International Monetary Fund has also recommended scrapping the triple lock, pointing to the "important savings" the UK government could achieve with it.
On inheritance tax, the Lords said it was “capricious and not currently fit for purpose”.
They said: “Consideration needs to be given to whether and how assets should be taxed on death or transfer in a way that ensures fairness between generations.”
Overall, the committee called on the government to “take steps to deliver a fairer society by supporting younger people in the housing and employment market, and deliver better in-work training and lifelong learning to prepare the country for the coming 100-year lifespan”.
Lord True, the committee's chairman, said: “We found that intergenerational bonds are still strong, and the evidence suggested both young and older people recognise the contribution the other makes and the challenges they face.
“However, there is a risk that those connections could be undermined if the government does not get a grip on key issues such as access to housing, secure employment and fairness in tax and benefits.”
David Sinclair, director of the International Longevity Centre, pointed out that the Lords were right that to be fit for an ageing society there was a “need a public policy response that looks right across the life course”.
He said: “The government could actually go further than the committee proposes.
"The national insurance exemption for older workers seems an anachronism. And savings could be better invested in any number of other initiatives - including in addressing the gross underfunding of public health and social care.
“Pensioner benefits are a matter of increasing political debate. While there is a strong case for universal pensioner benefits, it is also perfectly reasonable that these benefits should be taxed, so that those who can afford to pay do."
maria.espadinha@ft.com
