Claim comes as it's revealed the cost of maintaining the triple lock will reach £15.5 billion annually by 2030, three times higher than its original estimate.
A thinktank has warned that the State Pension could become ‘fiscally unsustainable’ as soon as 2036.
The Adam Smith Institute (ASI) said that problems would arise as a result of a higher ratio of people claiming the State Pension each year versus the number of working people paying NI, as well as the ‘ratcheting effect’ of the triple lock.
This lock guarantees that State Pension payments will rise each year by whichever is the highest out of three figures: inflation, average earnings growth or 2.5%.
However, the cost of maintaining the lock has been rising at a far faster rate than anticipated.
New research released today by the Government spending watchdog, the Office for Budget Responsibility (OBR), has forecast that the cost of moving from an earnings-link in 2012 to the triple lock is set to reach £15.5 billion annually by 2030, three times higher than its original estimate.
‘Outgoings to exceed income by 2036’
According to the ASI, the Treasury is expected to be spending more on welfare, the greatest proportion of which is the State Pension, by 2036 than it is receiving in National Insurance tax receipts.
“From that point onwards, it will rely on the National Insurance Investment Account Fund, which invests surplus funding back into the economy, to close the deficit," it said in a report.
“From 2040 onwards, the Fund will begin to deplete.”
It added that the State Pension had been on track to go bust by 2035, but the recent decision to hike NI contributions for employers from 13.8% to 15% had extended this deadline by a year.
Commenting on the findings, Maxwell Marlow, director of public affairs at the Institute, called on the Government to suspend the triple lock immediately.
“It should alarm us all that the State Pension could become unsustainable in just over a decade,” he said.
“Our latest analysis shows that by 2036, the government will spend more on welfare payments - the largest share of which is the State Pension - than it raises in National Insurance contributions.
“Just last year, we projected this tipping point would come in 2035, and even with the hike in National Insurance, we have only bought a year at the cost of Britain’s economic growth.
“Even if the economy recovers beyond forecasts, the State Pension in its current form remains grossly unsustainable.
“Working people are already taxed to the hilt to fund pension-benefit payments, and this unfairness will only deepen as our demographic deficit grows.
“If the Government is serious about securing Britain’s finances, it must suspend the triple lock immediately and move towards a system that is honest about the challenge posed by an ageing population.”
4 suggestions to improve the pension system
Elsewhere, the Institute for Fiscal Studies thinktank has also released a report on the state of UK pensions, calling for numerous reforms to the current system.
You can read the full report here, but in effect, it has made four recommendations.
The first is that the Government should choose a target level of the new State Pension as a percentage of economy-wide average earnings.
“The Government could use the current ‘triple lock’ to reach that target,” it said.
“But once that target is met, over the longer run the State Pension would rise in line with average earnings growth."
The second point is aimed at improving the amount we save into private pensions over our lives.
Key recommendations here include ending the practice where employer pension contributions only have to be made if the employee also contributes and increasing minimum default total pension contributions under automatic enrolment in particular for those on average earnings and above.
The IFS’ third point is focused on improving means-tested support for those in retirement.
“There have been significant rises in income poverty for people in their early 60s,” it said.
“Additional targeted financial support should be introduced to support those who are most harmed by increases in the State Pension age.”
To achieve this, it is calling on the Government to enhance Universal Credit for people within one year of their State Pension age, either for all on low incomes or targeted towards those with health conditions.
It also wants to see the Government focus on ways of boosting the take-up rates of means-tested support.
The fourth and final recommendation from the IFS is focused on helping retirees better manage their pension pot once they stop working.
“People managing ‘Defined Contribution’ pension pots face too many complex decisions over their (often numerous) pension pots,” it warned.
“They risk either running out of private pension wealth later in life or being overly conservative and not enjoying the fruits of their savings. This is a huge problem and an immensely difficult one.”
To counter this, it wants to see small pension pots automatically consolidated as a person nears retirement age.
It has also called those nearing retirement to be given access to high-quality information and support without having to pay for expensive and ongoing financial advice, along the lines of the Financial Conduct Authority’s recent proposals for targeted support.
Commenting on the need for reform in UK pensions, Paul Johnson, director of IFS, said: “There is much to celebrate about the current UK pensions system.
“The current generation of retirees is, on average, doing much better than any previous generation.
“Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups.
“The State Pension has been simplified and is now much more generous to many women than in the past.
“Many more employees have been brought into workplace pensions by the successful roll-out of automatic enrolment.
“But there is a risk that policymakers have become complacent when it comes to pensions.
“Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement.”