Ballooning NI deficit threat to state pension – GAD figures

The National Insurance fund used to pay out state pension will be exhausted by 2032 and a 5 per cent rise in NI is needed to plug the gap, the latest Government Actuary’s Department (GAD) projections show.

GAD’s analysis of the fund as at April 2015, published this week, says a 5 per cent rise in NI would ensure it does not go into deficit for the next 60 years.

NI contribution receipts are predicted to outweigh payments until 2025, buoyed by the ending of contracting out and the increase in women’s state pension age. But the NI fund balance will fall ‘rapidly to exhaustion’ in around 2032-33 unless other measures are taken, says GAD. This tipping point is reached around three years earlier than in the 2010 quinquennial review, mainly reflecting lower expected future earnings growth, which reduces the expected NIC receipts but has a lesser impact on benefits because of the triple lock.

GAD predicts the Treasury will have to pay £55.9bn a year into the fund by 2040, rising to £150.9 by 2060 and £481bn by 2080 unless changes are made.

The projections assume annual net migration of 184,000, almost double the 100,000 a year target of the Government.

AJ Bell senior analyst Tom Selby says: “The latest analysis from the Government’s own actuary paints a grim picture for the future of the state pension. 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 options open to policymakers to plug the funding gap are not attractive. The Government Actuary reckons a 5% increase in National Insurance Contributions would do the trick – hardly a realistic route for any politician wanting to maintain a grip on power.

“Alternatively, the state pension age could rise further, the value of the payment could be cut or other departments could have their budgets drastically reduced. In reality long-term costs will likely be reined in by a combination of the above, but make no mistake – if this nettle is not grasped today, it will be forced on policymakers tomorrow.”

Hymans Robertson partner Calum Cooper says: “It is not surprising that the Government Actuary Department has reached this conclusion that state pension funding levels are dwindling. The current system is dangerously unsustainable when you consider how technology and rising life expectancy could transform our working landscape over the next decade or two. The UK currently spends £100bn p.a. on the State pension and that this is expected to double over the next 20 years and double again in the following 20 years, it is clear that the current system needs to cha

“The chances are that our working landscape will look radically different over the next few decades. Life expectancy is continuing to rise faster than the State Pension age meaning many people will feel compelled to continue working well into “retirement”. In fact, our own longevity analysis found that the state pension age should now be at 74, if it had kept pace with life expectancy from the second world war.

“However, all of this could be swamped if the predicted potential for technological unemployment by AI comes true. The Bank of England and PwC have estimated that 1 in 3 jobs are currently in danger from automation. Clearly there is a wide range of outcomes but this outcome would be massive and would have a devastating impact not only on NI financing but would cause demands on state support to reach an all-time high. Perhaps it’s time to think beyond the State Pension and look towards something more age-agnostic.”

Now: Pensions director of policy Adrian Boulding says: “The warning from the Government Actuary’s Department demonstrates just how precarious the state pension really is.

“Increasing National Insurance contributions by 5 per cent could go some way to mitigate this issue. But increasing NICs is easier said than done and raises uncomfortable questions around intergenerational fairness.

“Research we conducted with millennials revealed 22 per cent of 18 to 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.”