Why the State Pension is unsustainable
Funding for the State Pension is running dry; young people should not expect to get any retirement help from the state.
The State Pension system is on the verge of a funding crisis, according to the think tank Centre for Policy Studies.
According to the think tank, the National Insurance Fund has drained rapidly since the financial recession. In the 2008/09 financial year, the Fund contained £53 billion, funded by National Insurance contributions. However, by 2012/13, this balance had plunged to £29.1 billion, with the Government Actuary’s Department (GAD) forecasting the Fund could be exhausted by 2035/36.
But the Centre for Policy Studies reckons the fund could actually be exhausted by next year.
Time running out for pensions?
The big worry for British workers and pensioners is that the State Pension currently accounts for a third of all income Britons have in retirement, according to new research from investment firm Old Mutual Wealth. So the warnings from the Centre for Policy Studies yet again highlights the need for everyone to make sure that they are saving enough (through pensions, ISAs and other tax-efficient vehicles) to properly fund their retirement years.
If and when the National Insurance Fund is depleted, the Government will continue to pay current and future pensions from general taxation. However, with the bill for State Pensions set to quadruple to £420 billion over the next 60 years, supporting British pensioners will put huge pressure on the UK's already-strained budget.
Even with record numbers of workers in employment and a strengthening recovery, the Government continues to borrow huge sums every month. From April to August 2014, the State spent £45.5 billion more than it earned, which is £2.6 billion more than the same period of 2013.
Barring some sort of economic miracle, increases in pension payouts caused by an ageing population will also push up Britain's budget deficit and reduce the UK's creditworthiness.
Higher taxes or lower pensions?
The Government is desperately short of funds. Without the cash reserve offered by the National Insurance Fund, the State will be forced to dig deeper into other tax receipts in order to keep up pension payments, an unsustainable situation.
Unless this situation improves soon, the report claims that pensions will be "watered down to a basic subsistence" level of income. Another possibility would be sharp tax increases for the under-45s, combined with longer waits for state retirement payouts.
One big problem for any Government seeking to reduce the State Pension is that it amounts to political suicide. The over-60s account for roughly a quarter of the UK's 50 million voters and have a strong tendency to vote, making Britain's seniors a powerful political faction. No political party wants to sign their own death warrant by curbing payments to pensioners.
Unfortunately, what this report clearly spells out is that, for the State Pension system to continue Britain's youngsters and middle-aged workers will have to shoulder considerably higher taxes. Without additional state retirement funding, the CPS describes pensions for the under-35s as "not viable, full stop. But of course, no politician can say this publicly."
Without an earmarked pot, pensions are a Ponzi scheme
All this suggests that the current system of state retirement benefits is indeed unsustainable.
With almost two-thirds of today's welfare spending going to the elderly, and the number of over-65s expected to rise by 5.5 million in the next two decades, the State Pension is clearly heading for a perilous crisis. I suspect that the answer for future governments will be to increase the state retirement age, which is already planned to rise to 68 by 2046.
What's more, with the Pensions Act 2014 providing for a regular review of the State Pension age (at least once every five years), this looks like an easy get-out for politicians. The state pension scheme is indeed unsustainable, but faces radical change. Today's under-35s should plan ahead for drastically watered-down pensions, which may not even kick in until they are well into their seventies. No matter which government is elected next May, the state will break its pension promises to today's young workers.
More on pensions:
Pensions are the best way to save
Tories to slash pensions 'death tax'
Pensioner property wealth hits new record high
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@Peter48 "Its not the baby boomers who will suffer as they vote in massive numbers and all parties are in the triple lock which ensures increases each year. It's the others - the powerless/unorganised -who will pay, the young, the disabled, the chronically ill, ....that's where the cuts will come ." You really need to study demographics, Peter48. They will tell you all you need to know about where the UK and the western economies are heading. You will then see that "the disabled, the chronically ill," and "the babyboomers" are going to be one and the same. @R You say: "I can't see Germany refusing to sell BMWs to us if a demand is there." Why not? At the whim of the EU the Germans are already refusing to sell their goods to the Russia, even though such actions are smashing up their industry.
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@peter48 is right; we are net importers from the EU countries. I can't see Germany refusing to sell BMWs to us if the demand is there; Spain and Italy won't refuse to stop making trains for us if we are paying. As @Hemry-gbg says, some states will follow our lead or, more likely, the changes will be made to the EU when they see that the Farage coalition is serious about this next year. The root problem with pensions is that there is no fund. Norway has a fund and it is in surplus. It can be done; it probably won't be done unless there is grassroots demand for it because every government sees the NI contribution (which is mixed with the ICT take at employer level and sent as one payment) as a source of funds for whatever it chooses. In addition to having a separate fund, we should be pressurising government to reduce spending to a manageable level and not to continually seek was to tax us more. r. What a cluttered screen this is now.
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It is the tax system that is unsustainable. The taxation of wages, goods and services leads to excessive deadweight losses. If there was a willingness to switch to a tax on the rental value of land, these losses would be eliminated. There would then be sufficient to pay for state pensions, infrastructure and all the other calls on the public purse.
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19 October 2014