Papers Cover ASI Pensions Research
In 2018, the last time that it was measured, the welfare system, of which the State Pension is the largest component, had a total lifetime liability to the British people of £8.9 trillion - three times the UK’s current GDP. This is set to balloon even further, due to the ratchet effect of the triple lock. The State Pension is paid from current tax revenues, rather than from money set aside in a dedicated pot built up during a person’s working life. In fact, the average person born in 1956 will receive £291,000 more than they paid in National Insurance tax. This is creating an economic burden on working-age people to subsidise pensioners.
This will be exacerbated by Britain’s demographic trends. By 2040, we are likely to have 22.7 million claiming the benefits including the State Pension (but only 34 million people of working age to fund it).
The Adam Smith Institute’s dynamic model takes into account this demographic deficit alongside a number of other factors including, but not limited to, data from the ONS, OBR and HMRC, on population growth forecasts, State Pension contributions, workforce participation and aggregate pay.
After factoring in increases in National Insurance contributions, the Adam Smith Institute found that the State Pension could become financially unsustainable by 2036, meaning that the Treasury is spending more on welfare, the greatest proportion of which is the State Pension, than it is receiving in National Insurance tax receipts. From that point onwards, it will rely on the National Insurance Investment Account Fund, which invests surplus funding back into the economy, to close the deficit. From 2040 onwards, the Fund will begin to deplete.
Whilst the prediction that the State Pension could become financially unsustainable by 2036 is one year later than our previous estimate, this development exposes a more fundamental problem. We are having to raise taxes simply to keep the system afloat. An ever-diminishing pool of workers are footing an increasingly unsustainable bill. Raising Employers’ National Insurance Contributions has suppressed wage growth and reduced employment. Yet, it will only keep the State Pension going for one more year. If Britain is to get its finances back on track, it must fundamentally reform the state pension.
Our analysis was covered in The Spectator, The Times (twice), The Express, Guido Fawkes, City AM, GB News, The Daily Star and a host of other outlets.
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