Millions of workers face lower state pensions as ageing population empties the pot

Millions of workers face £120 hike in National Insurance bills to help fund the state pension

*NI rates may have to go up by as much as 5 per cent to maintain the pension

*Any increase would mean that younger workers would have to pay more

*The move is likely add to a sense of inter-generational unfairness

*The UK’s ageing population is posing a challenge for the public finances

Millions of workers face higher National Insurance bills to fund state pensions, the government’s own analysts have warned.

The Government’s Actuary’s Department has revealed the National Insurance Fund, which pays the state pension and other benefits, will run out of cash by the mid-2030s.

Two former pensions ministers said the alternative to payment cuts is an annual tax hike for under-50s.

Baroness Ros Altmann, Tory Pensions Minister from 2015 to 2016, said: “The current provision for state pension payments is not enough to meet the cost of future pensions.

“Changes will be required if forecasts are right. There is a potential issue on inter-generational fairness if these forecasts are right as younger workers face paying more to secure their state pension. ”

The Government has three options to maintain the state pension, which makes up the majority of the NIF.

It can cut the amount it pays people, increase NI contributions or increase other taxes.

The state pension is operated on a pay-as-you-go system, with today’s workers funding today’s pensioners with a bit held back in reserve. But people living longer in retirement are pushing the bill up.

All workers earning £157 to £866 a week (£8,164 to £45,000 a year) pay NI at a rate of 12%, while bosses pay NI at 13.8% for those workers.

A 5% rise in contributions, the figure GAD says will fix the system, would cost those on £28,000 an extra £500 a year – if the rise is split equally between workers and their bosses.

Baroness Altmann’s predecessor, Lib Dem Steve Webb, now at insurer Royal London, said: “Faced with the bills of an ageing population, there will be pressure on governments to squeeze pensions and raise taxes, including NI contributions.”

The Treasury said: “We expect the fund to have a surplus for the foreseeable future. In the long run, life expectancy and demographic trends will continue to pose a challenge.”


What do my National Insurance contributions pay for?

NI is expected to raise around £125billion in 2017/2018. £24billion goes to the NHS. The remainder pays for the state pension and other social benefits.

Surely my NI just builds up over the years and there should be plenty in the pot to pay my state pension?

No. NI contributions you make now, pay today’s pensions and benefits bill.

Are there any other options?

The state pension age could be increased at a quicker rate.

Could the Triple Lock that guarantees a minimum 2.5% increase to the state pension go?

There has been talk of replacing this with a double lock that would mean state pension increases are based on inflation and earnings with no minimum guarantee.

Is this the first sign the state pension may not exist in the future?

There are no guarantees the state pension will last forever. Experts say stopping it would be political suicide and so it probably won’t happen. The Government would rather find another way out of this mess. The basics are that we are all going to have to work longer, pay more in and get less out in the future.

It could end up a means-tested benefit or become a postcode lottery, with the amount you get based on where you live.

Many options for controlling costs but hard choices ahead

By Ros Altmann

Former Pensions Minister

The Government Actuary’s main forecasts suggest that, on its most likely scenario, National Insurance might need to increase for the average worker by up to £1,000 a year from the 2030s.

If all the shortfall in pension costs were to fall on the employee NI contribution, the rate might have to rise from 12% to 17%. Of course, the money could be found by increasing other taxes instead.

Or the Government may have to reduce state support for pensioners. This would mean further cuts in future payments. The Government has reduced costs by increasing the state pension age and further increases are in the pipeline.

By the end of the 2030s, it is due to rise to 68 and the Government Actuary assumes it will continue to increase to 70.

If the age does not rise further, costs are projected to rise by twice as much – up to 10 percentage points. That would take average NI contributions to nearly 22%.

Dropping the triple lock and increasing pensions in line with average earnings would radically reduce increases in costs.

Clearly, there are different ways to control the costs of state pensions and policy makers face difficult decisions.

So what do you think?

Tell us in the comments.

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