I loved geography as a subject at school. It was not just for the benefit of getting out the classroom on field trips but I found topics such as, map reading, how landscapes formed, plate tectonics, and glaciation fascinating. I do, however, specifically remember one lesson on demographics that I found to be rather depressing. My teacher delivered the good news that we were all going to live longer, but the bad news was that there would be more pressure on the likes of the health service and state pension but, of even more importance, there would be a lower proportion of people of working age to financially support an ageing population.
I did take comfort in the fact that armed with this knowledge there was plenty of time for future governments to take action to ensure there was no cliff edge scenario. Unfortunately, this was a schoolboy error.
So almost 40 years on and where do we find ourselves?
According to the latest Government Actuary’s Department (GAD) quinquennial review of the national insurance fund (NIF), from which the state pension is funded, it will be totally drained in about 15 years time without further financial support from the government. Now, before anyone thinks they should jump from the proverbial cliff edge so as not to be a burden to the youth of today, one has to understand the workings of the NIF. It is not an investment fund but more akin to a current account. It has an opening balance at the beginning of the year which should be kept at a minimum of 16.7% of annual payments to provide a slush fund to cover any short term fluctuations. Then national insurance contributions go in, a proportion of these monies, in the region of 16%, is allocated to assist NHS funding with around 92% of the remaining fund being used to fund pension payments and the rest to fund mainly contributory based benefits.
If there are insufficient funds to meet the pension and benefits paid out the government can provide a grant from general taxation to top it up, though this is currently restricted by law to 17% of total benefits payable. So for example in 2016/17 £98.3bn, after the NHS allocation, was paid into the NIF, but £99.5bn was withdrawn leaving a shortfall in funding of £1.2bn. This reduced the balance in the NIF to £21.9bn. No grant was paid that year but £9.6bn had been paid by the government the previous year.
So the real issue is simply that the state pension is funded on an on-going basis and as the cost escalates either money has to be found from elsewhere or savings have to be made. Increasing the state pension age (SPA) for women and moving the SPA to 66 by the end of 2020 does provide some temporary relief but some seismic action has to be taken sooner rather than later and cannot role on for another 40 years.
So what are the other options…
Raise taxes, the GAD reckons 5% increase would be sufficient, applying NICs to all income and not just earned , bringing forward the increases in SPA and consider raising the SPA to beyond aged 70 or even making the state pension means tested, these are just some of the options that need to be considered. None would be particularly popular but time is quickly running out.
Going back to my schooldays, I recall having to read the novel Logan’s Run. Now there’s a depressing outlook on the future if there ever was one.
This article first appeared on Professional Adviser