Funding for the state pension will be depleted by 2032 without a rise in National Insurance Contributions, the Government Actuary’s Department predicts.
In order to avoid a deficit, GAD says that a 5 per cent rise in NICs could be needed.
The numbers assume current policy such as the triple-lock holds and the state pension age rises in line with expectations.
Aegon pensions director Steven Cameron says: “What many people may not realise is there’s no big pot of money set aside to pay future state pensions. Instead, they are funded on a ‘pay as you go’ basis meaning future state pensioners are reliant on the NI contributions of future workers to pay their pensions, creating the potential for intergenerational tension. There’s always a trade-off to be made between state pension age, the yearly amount of state pension paid out, other benefits NI pays for such as the current hot topic of social care, and at what rates NI contributions need to be set to cover these costs.”
AJ Bell senior analyst Tom Selby says that the figures paint a “grim picture” for the future of the state pension, noting that other options to mitigate pension spending including further increasing the state pension age or reducing the value of the state pension appear unpalatable.
He says: “The harsh reality is that, as demographics bite and the Baby Boomers flood towards retirement, the cost of the state pension will inevitably balloon.”