Why state pension is less under threat than thought

While good news short term, over the longer term the sustainability of the state pension is in doubt. 

Record levels of employment has put the state pension in a healthier position than previously thought – in the near term at least.

Fresh figures released by the Government Actuary’s Department (GAD) show income from national insurance is projected to exceed expenditure by £8.2 billion in 2020/21 and continue to exceed expenditure until 2024/25.

Steven Cameron, pensions director at Aegon, points out that the figures “reverse what was a worrying trend”.

He adds: “The national insurance fund was slowly running down and it looked as though an increase to NI might be required in order to ensure the sustainability of the state pension. However, today’s figures indicate that in the near term there is no cause for concern.

“Near full employment means higher NI contributions are being made by employees and employers, and the decision to slowly increase the state pension age is offsetting the ongoing uprating of state pensions under the triple lock.”

At the start of 2018, GAD warned that millions of workers faced the prospect of paying higher national insurance contributions to fund the state pension. It calculated that a 5% hike was required to sustain the state pension, which is being stretched by the UK’s ageing population. 

The state pension is paid out of the national insurance fund, which consists of employees’ and their employers’ NI contributions (NICs).

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While this latest report will be good news for the government in the short term, GAD highlights that “over the longer term, benefit expenditure is expected to exceed NICs income primarily as a result of: an increasing old-age dependency ratio; a projected increase in the average state pension benefit payable, as individuals start to receive the new state pension; and increases in the standard rate of state pension benefits arising from the ‘triple-lock’ policy.”

The sustainability of the state pension has been called into question by the influential think tank, the Centre for Social Justice. Last summer, it proposed the state pension should rise to 75 by 2035. This came under heavy criticism. As many critics pointed out, life expectancy in some parts of the country is roughly around 75.

Young people also do not believe that the state will provide much for them either. Recent research by financial provider Canada Life UK found that one out of five (25%) of 18-to 24-year-olds think that the state pension won’t exist by the time that they retire.

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