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The body responsible for advising the government on the state pension has said national insurance contributions may have to rise by 5% to fund the state pension over the long-term.
The Government Actuary’s Department (GAD) said the current balance of the national insurance fund was ‘relatively’ low.
This fund, which is used to pay benefits including the state pension on a pay-as-you-go basis, will fall to zero by 2032, the GAD said.
‘If the system is to continue to cover the current form of state pension and other benefits, then either the fund’s income has to rise or expenditure has to be controlled,’ the report said.
The GAD suggested two ways to increase the income of the fund. Either the government would have to raise national insurance (NI) contributions by 5% higher than the current rates – a move it admits would be ‘particularly politically sensitive’.
Or it could introduce legislation to change the law which states only 17% of benefits paid by the fund can be provided from general income tax revenue. But the GAD says it would require primary legislation to remove this cap.
Tom Selby, a senior analyst at AJ Bell, said the government had difficult decisions to make over the state pension.
‘The latest report from the GAD is a brutal reminder of the fiscal reality of funding the UK’s ageing population. I suspect most people aren’t even aware that a NI fund exists, let alone that it could run out in less than 15 years’ time,’ he said.
‘The harsh reality is that, in order to ensure the state pension remains affordable, the Treasury must either commit more funds from elsewhere, increase the state pension age, reduce the value of the state pension or hike NI contributions. None of these options are particularly attractive politically.’
Adrain Boulding, director of policy at NOW Pensions, said the report showed 'just how precarious the state pension really is'.
'Increasing NI contributions is easier said than done and raises uncomfortable questions around intergenerational fairness.'
The government has faced challenges in its efforts to increase NI rates. Last year chancellor Philip Hammond was forced to U-turn on his policy to increase NI contributions for the self-employed.