I loved geography as a subject at school. It was not just for the benefit of getting out of the classroom on field trips either – 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 we were all going to live longer although the bad news was there would be more pressure on the likes of the health service and state pension. Of even more importance, there would be a lower proportion of people of working age to support an ageing population financially.
I did take some comfort from 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 – quite literally -a schoolboy error.
Almost 40 years on then, 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 off the proverbial cliff so as not to be a burden on 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. Thus in 2016/17, for example, £98.3bn, after the NHS allocation, was paid into the NIF, but £99.5bn was withdrawn leaving a shortfall in funding of £1.2bn.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.
Other options
So the real issue is simply the state pension is funded on an ongoing 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 it 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 the SPA and consider raising the SPA to beyond age 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 ever there was one.
Neil MacGillivray is head of technical support at James Hay
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