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Why Government Faces Pressure To Raise The Pension Age

The Government has delayed the decision on whether the state pension age will increase to 68 (Alamy)

4 min read

A new report has urged government to increase the state pension age from 66 to 67 by 2028 in order to face the country’s “very real economic challenges”.

Prime Minister Rishi Sunak has delayed the decision on whether the increase should go ahead until after the next general election. The major new report, commissioned by Baroness Neville-Rolfe, said it was “not appropriate” for the government to postpone the move to 67 by 2028.  

A separate DWP report in 2022 found that if Britain did not reduce spending on state pensions the government could default on the welfare state in two decades’ time.

The National Insurance Fund, which pays for benefits and pensions, would be ‘exhausted’ by 2043 without significant extra funding from the Treasury.

The TaxPayers' Alliance media campaign manager Conor Holohan told PoliticsHome that the UK's ageing population left the government with an "affordability crisis" on pensions, and that people were not keen to pay higher taxes to address it. 

"Many governments across the world are grappling with this ticking time bomb," he said. 

“Politicians need to be brave and change tack so the state pension system can be properly and fairly funded.” 

Here's what you need to know about how the current system works, and why experts believe it is unsustainable...

What is the National Insurance Fund?

National Insurance Contributions (NICs) are paid by employees and employers, and are sent to the National Insurance Fund annually.

The money the Fund receives from NICs pays for benefits including state pensions, contributions-based jobseeker’s allowance and maternity allowance. 

According to a House of Commons report, retirement pensions accounted for more than 90 per cent of benefit expenditure from the Fund in 2019. 

Last year the government’s Quinquennial Actuary report found the level of spending was potentially unsustainable.

Pressures on the public finances

Over the next few decades the Triple Lock and Britain's ageing population will put pressure on the Fund. 

Commentators have suggested abandoning the Triple Lock – which protects millions of pensioners from inflation – could relieve some of the financial stress.

"We need a plan for all of this [in the long term], you can't just each year gaze as bystanders," former Liberal Democrat pensions minister and expert Steve Webb told PoliticsHome.

"If the number of pensioners is still going up, then either you raise the pension age further and faster... or you break the Triple Lock."

However, the Government denied it was even considering scrapping the Triple Lock on pensions. 

“The triple lock on pensions is not going anywhere and, while there is currently a surplus of funds in the National Insurance Fund, we can quickly legislate to top it up via a Treasury Grant if needed,” a HM Treasury spokesperon told PoliticsHome.

Other experts have suggested a wider debate over Britain's pension is needed. 

Professor of Political Economy at King's College University of London Mark Pennington told PoliticsHome he called for a "proper public debate" on the issue and believed that title "National Insurance" was misleading. 

"Many people think they are paying into a pension fund. That is the case in some continental systems but in the UK we do not have an insurance scheme," he explained. 

"Essentially, today's pensions are being paid for by tax contributions. Taxpayers' money immediately goes out to support the recipients.

"In any system financed like that you meet periodic crises, where the number of people you need to support becomes greater than the number of people paying for it. The only way to deal with this is to have a debate about such a system."

The number of pension age people in the UK is growing exponentially

The single biggest factor affecting Britain’s ability to keep in line with its welfare commitments is the country’s ageing population.

Almost one in five Britons (19 per cent) were over the age of 65 in 2019. By 2043 this figure is expected to grow by five per cent, meaning one in four people will be 65 or older. 

On current projections, figures show benefit expenditure is expected to be 88 per cent higher in 2085 than it was in 2020. 

To prevent the Fund from defaulting, the Chancellor of the Exchequer could boost the Fund's finances with a Treasury Grant. 

To put more money in the pot if the Fund's demands keep increasing, future governments will have to modernise the Social Security Act 1993.

The current legislation caps the Treasury Grant to 17 per cent of the year's estimated benefit expenditure.

The government will have to amend this bill by 2058-59 if it does not want to exceed the cap. 

Additional reporting from Nadine Batchelor-Hunt

 

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