State Pension Could Go Bust As Early As 2035
The Adam Smith Institute (ASI) built a new dynamic model which calculated when the State Pension could become fiscally unsustainable;
The ASI defines this as the point at which the state will be spending more on welfare payouts, the greatest proportion of which is the State Pension, than it will be receiving in National Insurance tax receipts;
This could happen as early as 2035. This is a crisis point for fiscal rules and Treasury spending commitments;
The increasing unaffordability of the State Pension is in great part due to the ratcheting effect of the ‘triple lock’;
In an accompanying research paper, report author Maxwell Marlow calls on the next government to urgently reform the State Pension; for example, through moving to a ‘double lock’ or smooth earning link, or by means-testing the State Pension.
In 2021, the last time that it was measured, the State Pension had a total obligation to the British people of £8.9 trillion- three times the UK’s current GDP. This is set to balloon even further, due to the ratchet effect of the triple lock.
The State Pension is paid from current tax revenues, rather than from money set aside in a dedicated pot built up during a person’s working life. In fact, the average person born in 1956 will receive £291,000 more than they put in. This is creating an economic burden on working-age people.
This will be exacerbated by Britain’s demographic trends. By 2040, we are likely to have 22.7 million claiming the benefits including the State Pension (but only 34 million people of working age to fund it.)
The Adam Smith Institute’s dynamic model takes into account this demographic deficit alongside a number of other factors including, but not limited to, data from the ONS, OBR and HMRC, on population growth forecasts, State Pension contributions, workforce participation, and aggregate pay. It found that the State Pension could become financially unsustainable by 2035, meaning that the Treasury is spending more on welfare, the greatest proportion of which is the State Pension, than it is receiving in National Insurance tax receipts.
The author of the accompanying report, Maxwell Marlow, urges politicians to have a full and honest debate with the public about the future of the State Pension, and to consider a number of reforms, including means-testing the State Pension, transferring to a ‘double lock’ or smooth earnings link, and moving towards a Swedish-style pension system.
Maxwell Marlow, report author and Director of Research at the Adam Smith Institute said:
“It should alarm us all that the state pension could become fiscally unsustainable within the next 10 years.
Working-aged people are already taxed to the hilt in order to universally subsidise pensioners, and this inherent unfairness within Britain’s economy will only become more entrenched as our demographic deficit worsens.
The government should look to review the state pension as a matter of urgency, either through means testing so that those with a net worth of more than £1 million are ineligible, or by moving to a double lock system to avoid the destructive ratcheting we see today.”
Notes to editors:
For further comment, or to arrange an interview, please contact emily@adamsmith.org / +44 7584778207
Maxwell Marlow is Director of Research at the Adam Smith Institute.
The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.