State Pension Could Become Insolvent By 2036 Despite Tax Rises
The Adam Smith Institute (ASI) has updated its dynamic model which calculates when the State Pension could become fiscally unsustainable;
The ASI defines this as the point at which the state will be spending more on welfare payouts, the greatest proportion of which is the State Pension, than it will be receiving in National Insurance tax receipts;
Despite increases to Employer National Insurance Contributions, this could happen as early as 2036. This is a crisis point for the fiscal environment and Treasury spending commitments;
The ASI had previously predicted that the state pension could go bust by 2035, meaning that National Insurance tax rises have only extended its lifespan by one year;
The increasing unaffordability of the State Pension is in great part due to the ratcheting effect of the ‘triple lock’;
In an accompanying comment, Maxwell Marlow, Director of Public Affairs at the Adam Smith Institute, calls on the government to urgently suspend the triple lock to protect the public finances.
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.
Maxwell Marlow, Director of Public Affairs at the Adam Smith Institute, said:
“It should alarm us all that the State Pension could become unsustainable in just over a decade. Such a dire prognosis is a symptom of Britain’s broken welfare state. Struggling workers and firms will not be able to subsidise the ballooning welfare bill for much longer. We must be clear - the state pension is a benefit, not one paid into over a lifetime, but drawn out of current taxation.
"Our latest analysis shows that by 2036, the government will spend more on welfare payments - the largest share of which is the State Pension - than it raises in National Insurance contributions. Just last year, we projected this tipping point would come in 2035, and even with the hike in National Insurance, we have only bought a year at the cost of Britain’s economic growth. After that, the reserves of the National Insurance Investment Account Fund will start to be drawn down. From 2040, the Fund will actually start to shrink as these deficits grow too large to be covered by investment earnings.
"Even if the economy recovers beyond forecasts, the State Pension in its current form remains grossly unsustainable. Working people are already taxed to the hilt to fund pension-benefit payments and this unfairness will only deepen as our demographic deficit grows. If the government is serious about securing Britain’s finances, it must suspend the triple lock immediately and move towards a system that is honest about the challenge posed by an ageing population.”
ENDS
Notes to editors:
For details on the methodology, or to arrange an interview, please contact sebastian@adamsmith.org / +44 7584778207
The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.