In the latest Government Actuary’s Department (GAD) projections they suggest that the National Insurance fund used to pay out the state pension will be exhausted by 2033.
The projections in the report are based upon the assumption that national insurance contribution rates and fund benefits remain as currently defined, subject to up-rating and re-rating policy.
It shows that from 2025 to 2026, benefit expenditure is expected to exceed National Insurance Contribution (NIC) receipts by an ever-increasing amount, equivalent to about 1% to 1.3% of GDP.
The report said that the cause was an aging population with increases to lift expectancy, a projected increase in the average state pension benefit payable as individuals start to receive a flat-rate state pension, and increases to the standard rate of basic state pension and new state pension as a result of the government’s triple lock policy.
It said the fund balance is expected to increase until around 2024-2025 without any Treasury grants being required, but without additional support, it will be exhausted by 2033.
The senior analyst at AJ Bell Tom Selby said the findings paint a “grim picture of the future for state pensions”.
“The harsh reality is that, as demographics bite and the baby boomers floor towards retirement, the cost of the state pension will inevitably boom,” he said. “The Government Actuary predicts the fund used to pay out benefits will be exhausted in around 15 years’ time, at which point the Treasury will have to step in to ensure people continue to receive their state pensions.
These Treasury grants will kick in at £11.6bn a year in 2030 and increase rapidly to £151bn by 2060 and £482bn by 2080 if the system stays as it is.
The options open to policymakers to plug the funding gap are not attractive. The Government Actuary reckons a 5% increase in NICs would do the trick- hardly a realistic route for any politician wanting to maintain a grip of power.
He went on the say: “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 retained in by combination of the above, but make no mistake-if this nettle is not grasped today, it will be forced on policy makers tomorrow