Millions of workers face higher National Insurance bills to fund state pensions, the government’s own analysts have warned.
The Government Actuary Department (GAD) said NI rates may have to go up by as much as 5 per cent to maintain the stability of the pension fund.
This would mean an annual increase of £120 on the average worker’s tax bill – and a £138 increase for their employer.
Last night experts said the shocking projections underlined the depth of Britain’s pensions crisis.
The warned ministers may be forced to increase the state pension age yet further, or even reduce pension payments, to avoid putting up tax.
The Department for Work and Pensions (DWP) must carry out drastic reforms if the state pension is to be kept functioning
Any NI hike would be hugely controversial because it would see younger workers forced to pay extra to fund the pensions of those who have already retired.
This is because people’s NI contributions do not pay for their own future pensions but the pensions of people who have already retired.
In addition, pensioners pay no NI at all – adding to many young people’s sense of intergenerational unfairness.
The findings were contained in a report by the Government Actuary’s Department, which provides projections for ministers.
They warned that Britain’s ageing population meant that changes to the tax regime may be required to make the National Insurance Fund – most of which goes towards pensions – sustainable.
They say that unless action is taken, the Fund will be exhausted by 2033.
The projections are disappointing for the government because recently-announced reforms – including raising the state pension age – were supposed to have sorted the issue out.
GAD’s report said the NI Fund could be made to break even in future years but only with if rates are ‘around 5 per cent higher than the current rates’.
‘Substantial increases in National Insurance contribution rates would both be particularly politically sensitive and would again require primary legislation,’ it said.
‘These potential resolutions to the lack of long-term sustainability are all difficult and require viewing the Fund in the wider context of public finances.
‘Regular monitoring, with suitable actions taken as a result, should ensure that additional funds are found in time to ensure that people continue to receive the State Pensions they expect and thus promote the intergenerational trust on which the system depends.’
Steven Cameron, director at pensions firm Aegon, said failure to act on Britain’ s unsustainable pensions system would ‘store up extra costs for younger generations in future’.
‘There won’t be enough coming in from National Insurance to cover the cost of paying the state pension,’ he said.
‘To stop that happening, NI contributions have to go up or the government will have to make changes to the state pension or the age it is paid from.’
Ministers announced last year that the state pension age would rise to 68 over two years from 2037 – nine years earlier than originally planned.
At present, the NI rate for most employees is 12 per cent on earnings above £8,164. A 5 per cent increase would put this up to 12.6 per cent.
Aegon said that a worker on £28,000 pays around £2,400 in NI a year. The increase would see this increase by £120 to £2,520.
For the average employer, the NI rate will go from 13.8pc to 14.5pc, pushing its bill of £2,760 up by £138.
For someone earning £45,000, the increase would see their bill go up by £221 to £4,645 – while their employer would face a bill of £5,345, an extra £258.
Mr Cameron added: ‘What many people may not realise is there’s no big pot of money set aside to pay future state pensions.
‘Instead, they are funded on a ‘pay as you go’ basis meaning future state pensioners are reliant on the NI contributions of future workers to pay their pensions, creating the potential for intergenerational tension.
‘There’s always a trade-off to be made between state pension age, the yearly amount of state pension paid out, other benefits NI pay for such as the current hot topic of social care, and at what rates NI contributions need to be set to cover these costs.’
Former pensions minister Baroness Altmann warned that the rising population will also lead to vastly increasing sums spent on social care.
‘The Government Actuary is warning that National Insurance contributions are not high enough to cover future state pension costs,’ she said.
‘This is worrying because the new State Pension system, which has only just started, was supposed to ensure future state pension costs would be sustainable.
‘This still takes no account of the cost of providing care for increasing numbers of older pensioners in future. The UK pension crisis rumbles on.’
AJ Bell senior analyst Tom Selby told the Financial Times that the increases paint a ‘grim picture for the future of the state pension’.
‘The harsh reality is that, as demographics bite and the Baby Boomers floor towards retirement, the cost of the state pension will inevitably boom,’ he said.
Younger people will be required to pay more taxes to keep the state pension alive
‘The options open to policymakers to plug the funding gap are not attractive. The Government Actuary reckons a 5 per cent increase in NICs would do the trick – hardly a realistic route for any politician wanting to maintain a grip of power.
‘Alternatively, the state pension age could rise further, the value of the payment could be cut or other departments could have their budgets drastically reduced.’
Last night a Treasury spokesman admitted that the ageing population would provoke a ‘challenge’ for the public finances.
‘We expect the fund to have a surplus for the foreseeable future,’ he said.
‘In the long run, life expectancy and demographic trends will continue to pose a challenge for the public finances.
‘That is why we are committed to improving productivity, reducing the deficit and building an economy fit for the future.’