The State Pension system is on the verge of a funding crisis, according to the think tank Centre for Policy Studies.
According to the think tank, the National Insurance Fund has drained rapidly since the financial recession. In the 2008/09 financial year, the Fund contained £53 billion, funded by National Insurance contributions. However, by 2012/13, this balance had plunged to £29.1 billion, with the Government Actuary’s Department (GAD) forecasting the Fund could be exhausted by 2035/36.
But the Centre for Policy Studies reckons the fund could actually be exhausted by next year.
Time running out for pensions?
The big worry for British workers and pensioners is that the State Pension currently accounts for a third of all income Britons have in retirement, according to new research from investment firm Old Mutual Wealth. So the warnings from the Centre for Policy Studies yet again highlights the need for everyone to make sure that they are saving enough (through pensions, ISAs and other tax-efficient vehicles) to properly fund their retirement years.
If and when the National Insurance Fund is depleted, the Government will continue to pay current and future pensions from general taxation. However, with the bill for State Pensions set to quadruple to £420 billion over the next 60 years, supporting British pensioners will put huge pressure on the UK's already-strained budget.
Even with record numbers of workers in employment and a strengthening recovery, the Government continues to borrow huge sums every month. From April to August 2014, the State spent £45.5 billion more than it earned, which is £2.6 billion more than the same period of 2013.
Barring some sort of economic miracle, increases in pension payouts caused by an ageing population will also push up Britain's budget deficit and reduce the UK's creditworthiness.
Higher taxes or lower pensions?
The Government is desperately short of funds. Without the cash reserve offered by the National Insurance Fund, the State will be forced to dig deeper into other tax receipts in order to keep up pension payments, an unsustainable situation.
Unless this situation improves soon, the report claims that pensions will be "watered down to a basic subsistence" level of income. Another possibility would be sharp tax increases for the under-45s, combined with longer waits for state retirement payouts.
One big problem for any Government seeking to reduce the State Pension is that it amounts to political suicide. The over-60s account for roughly a quarter of the UK's 50 million voters and have a strong tendency to vote, making Britain's seniors a powerful political faction. No political party wants to sign their own death warrant by curbing payments to pensioners.
Unfortunately, what this report clearly spells out is that, for the State Pension system to continue Britain's youngsters and middle-aged workers will have to shoulder considerably higher taxes. Without additional state retirement funding, the CPS describes pensions for the under-35s as "not viable, full stop. But of course, no politician can say this publicly."
Without an earmarked pot, pensions are a Ponzi scheme
All this suggests that the current system of state retirement benefits is indeed unsustainable.
With almost two-thirds of today's welfare spending going to the elderly, and the number of over-65s expected to rise by 5.5 million in the next two decades, the State Pension is clearly heading for a perilous crisis. I suspect that the answer for future governments will be to increase the state retirement age, which is already planned to rise to 68 by 2046.
What's more, with the Pensions Act 2014 providing for a regular review of the State Pension age (at least once every five years), this looks like an easy get-out for politicians. The state pension scheme is indeed unsustainable, but faces radical change. Today's under-35s should plan ahead for drastically watered-down pensions, which may not even kick in until they are well into their seventies. No matter which government is elected next May, the state will break its pension promises to today's young workers.