When the State Pension pot runs dry – in 2032
16 January 2018
The latest Government Actuary’s Department (GAD) projections suggest the National Insurance fund, which is used to pay out state pension, could be exhausted by 2032.
GAD’s base-case projections are that as the old-age dependency ratio (the number of pensioners per 1,000 people of working age) increases, introduction of the new State pension and continuance of the triple-lock, from 2025-2026, benefit expenditure is expected to exceed NI contribution receipts by an ever increasing amount.
While increases in State pensions age from 2037 onwards will help mitigate the effect, from around 2030, GAD had predicted that Treasury will have to step in with ever increasing levels of grants, worth hundreds of billions of pounds, to help keep the State pension funded.
GAD has suggested that in order to keep the State pension from going into deficit, a 5% increase in NI contributions is necessary. Other options open to ministers to address the funding crisis include raising the state pension age; cutting the value of the state pension; or reducing spending elsewhere.
The figures demonstrate “just how precarious the state pension really is”, said Adrian Boulding, director of Policy at NOW: Pensions.
“Increasing National Insurance contributions by 5% could go some way to mitigate this issue. But increasing NICs is easier said than done and raises uncomfortable questions around intergenerational fairness.”
Steven Cameron, pensions director at Aegon added that people often did not realise that “there’s no big pot of money set aside to pay future state pensions… they are funded on a ‘pay as you go’ basis meaning future state pensioners are reliant on the NI contributions of future workers to pay their pensions.”
The trade-off, he said, would be between state pension age, the yearly amount of state pension paid out, other benefits NI pay for such as the current hot topic of social care, and at what rates NI contributions need to be set to cover these costs.
“For many, the state pension continues to be a core part of their total income in retirement and something they rely on. 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.”
Tom Selby, senior analyst at AJ Bell, added: The harsh reality is that, as demographics bite and the Baby Boomers flood towards retirement, the cost of the state pension will inevitably balloon.
The Treasury grants, Selby said, would kick in at £11.6 billion a year in 2030 and increase rapidly to £151 billion by 2060 and £482 billion by 2080 if the system stayed as it is.
“The options open to policymakers to plug the funding gap are not attractive,” he said, with a 5% increase in National Insurance Contributions “hardly a realistic route for any politician wanting to maintain a grip on power.
In reality long-term costs would likely be reined in by a combination of further raising of the State Pension Age, cutting benefits paid, and drastic cuts to government departments, he suggested, “but make no mistake – if this nettle is not grasped today, it will be forced on policymakers tomorrow.”
Bolding added that research conducted by NOW: Pensions with millennials revealed one in five (22%) 18 – 30 year olds are pessimistic about the future of the state pension and don’t believe it will exist when they retire.
“To protect against an uncertain future, having workplace pension savings is essential which is where auto enrolment has the potential to make a big difference.”
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