State pension cash could run out, report claims

George Osborne is unlikely to fully commit to abolishing NICs with a general election looming

The state pension is facing an imminent funding crisis according to the think-tank the Centre for Policy Studies.

The report from the right- leaning CPS suggested that below-inflation pay rises since the global financial crisis broke in 2008 has drained the national insurance fund of cash at exactly the same time as extra longevity has meant that the calls on the state pension are greater than ever.

As a result, earlier estimates from the Government Actuary Department (GAD) that the national insurance fund has enough cash in it to last through to 2035-36 have proved well short of the mark.

In fact, in a worst case scenario, the CPS has said that the national insurance could start to run out next year.

This will be acutely embarrassing to policymakers and the Treasury who have based their moves to increase the state pension age on the calculations done by the GAD.

However, in it’s calculations, the GAD has been factoring in annual real earnings growth – above inflation – of 2.4 per cent per year. But since the financial crash led to recession, earnings have actually been running below inflation.

The report author Michael Johnson stated that the GAD sums are clearly wrong and that, as a result, the national insurance fund was running out of money: “It (GAD estimate) is not supported by historical data, and even the GAD has admitted its own concerns about this assumption.”

Mr Johnson also questioned whether the country could afford to pay a state pension high enough for people to live off: “The next generation should be advised that their state pension will be, at best, derisory. Indeed it would be prudent to plan around not receiving anything at all,” Mr Johnson said.

The CPS has long been calling for the abolition of national insurance contributions (NICs) and its replacement with a single earnings tax which would combine both income tax and NICs. Traditionally NICs have been held in its own fund separate to income tax.

However, a source at the Treasury dismissed the report’s finding as a “bit of a scare” and said that a new improved single state pension will come on stream in 2016 with the link to earnings also restored, which should mean that millions of pensioners should be in line for increased payouts.

What’s more, the current plans to increase the state pension age from 65 to 66 in 2020, and 67 from 2026 will continue as planned.

As for the calls to abolish NICs, in 2011 the Chancellor George Osborne undertook a ‘call for evidence’ on the subject in 2011 but few conclusions were drawn.

Now with the election looming a firm commitment on abolishing NICs is unlikely in the forthcoming Chancellor’s Autumn statement.

However, the Chancellor may decide that doing just such a thing would allow him to go into the election with the mantle of tax reformer.