The state pension could become increasingly difficult to sustain as the number of older people continues to rise and the triple lock guarantee weighs on government coffers, say pension commentators.
Figures from the Office for National Statistics showed one of the lowest birth rates in nearly two decades in 2021, suggesting a burgeoning imbalance between the number of older people in receipt of the state pension and younger people in work supporting those payments through their National Insurance contributions.
In 2021, there were 624,828 live births, slightly higher than the 613,936 registered in 2020 but among the lowest figures since the early 2000s and significantly below the 880,000 seen in 1947.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said the birth rate, combined with increasing longevity, has huge consequences for state pension policy.
Morrissey said: “Birth rates shift over time – we saw birth rates well in excess of 700,000 and even 800,000 per year in the 1960s and the post war era but the trend in recent years is downwards.
“With the number of older people continuing to rise there is a real imbalance when it comes to younger people in the workforce supporting a burgeoning ageing population and the sums don’t add up.”
Commentators have also questioned the impact of the triple lock policy, which was introduced in 2010 to ensure that the state pension would not lose value over time. The policy, which promises to increase the state pension every April in line with the highest of inflation, wage growth or 2.5%, will see the 2023/24 state pension increase by a record 10.1%.
While Chancellor Jeremy Hunt’s pledge to honour the commitment provided a welcome boost to pensioners, there is growing debate around whether it’s the fairest way to increase the state pension.
Currently, the state pension is funded from National Insurance contributions. However, the government’s decision to significantly increase the earnings threshold above which contributions are paid has resulted in the Government receiving less from National Insurance receipts, both this year and in future.
Steven Cameron, pensions director at Aegon, said: “The Government Actuary’s latest report shows that in each year from 2024/25 till 2027/28, receipts will be less than expenditure. While these latest figures don’t look beyond 2028, unless changes are made, the state pension looks increasingly unaffordable. While there is a very small fund to cover the shortfalls till 2028, it is declining rapidly and could run out entirely unless the Treasury steps in and pays special grants.
“The Government did honour the state pension triple lock this year, but there is growing concern that granting such generous upratings in future years will simply be unaffordable, without putting growing pressures on today’s already stretched workers.”
Cameron said there’s a strong likelihood that the Government, which is currently carrying out a review into state pension age, will need to increase beyond age 67 earlier than planned.
Morrissey added: “In the UK auto-enrolment will help more people build a pension to see them through their retirement but with state pension forming the backbone of people’s retirement income people need more certainty around when and how they get their state pension so they can plan.
“The time has come for a thorough review of state pension to give people a longer-term view so they can make these plans.”
