Farewell to triple lockdown – doubt it’ll come back to stay, says RACHEL RICKARD STRAUS: National Insurance Fund could run out in a decade
Under lock and key: if a private pension was run like the state pension, the leaders would surely be arrested
It’s an open secret that the state pension works like a giant Ponzi scheme. When workers pay national insurance contributions, they are not ring-fenced to finance their own state pension. There’s no nice pot of money accumulating somewhere for me, labeled ‘Rachel’s retirement’. Instead, workers’ contributions are now used to pay state pensions for current retirees.
Of course, there is no theft or deception, like in real Ponzi schemes. But if a private pension were run like the state pension – with funds able to pay only a fraction of its debts – the managers would surely be arrested.
We have a tacit intergenerational agreement. Workers pay for current retirees in the hope that when they retire they will receive the same treatment from future workers.
This works well as long as there are at least as many entries into the pot as there are exits. But a report by the government actuary last week suggested the days of balancing the books were numbered.
The National Insurance Fund is in surplus, but is expected to be in deficit by next year. In fact, another report from those same calculators last year projected that the fund would be depleted within a decade.
The pot empties for two main reasons. First, the population is aging, so fewer people are contributing and more are applying. While in 2020 there were 27 retirees for every 100 workers, in 2085 there will be 43.
Second, the state pension becomes more generous – and therefore expensive – every year thanks to the triple lock. This ensures that it increases each year by the rate of earnings growth, inflation or 2.5%, whichever is greater. This year’s 10.1% increase – which is expected to take place next April – will be the biggest rise since 1991.
So what can be done to ensure that the public pension is available for future generations? There are a number of options – none are particularly palatable.
Workers could be asked to pay more national insurance contributions. But with millions of people already struggling to make ends meet, higher taxation could be a very difficult task.
The government could top up the national insurance pot with money from general taxation. This has happened in the past, and the Treasury must pay if the fund falls below one-sixth of its annual expenditure. But more money spent on pensions could mean less on schools, hospitals, roads or defence.
The alternatives are to give pensioners less, rather than asking workers to pay more. They could include reducing or means-testing the state pension or raising the age at which we become eligible.
None of these options will go over well – as a look across the Channel confirms. On Thursday, more than a million people joined protests across France against plans to raise the retirement age from 62 to 64.
I suspect this dilemma will play out in many ways in the decades to come. I think it is inevitable that over time a government with a large majority will find an excuse to break the triple lock. Once broken, I doubt it will come back.
Second, I suspect there will be changes to pension promises in the distant future. People in their 20s and 30s are less likely than those already close to retirement to take to the streets to protest changes to their pensions that won’t affect them for decades.
On page 65 of Wealth & Personal Finance, journalist Sarah Davidson explains what you can do to get the retirement you want. Among her valuable suggestions, she proposes that young workers should be careful not to depend too much on the state pension in retirement. It may not exist in its present form forever.
Forecasts suggest that the state pension pot will run out a decade before I retire. I can’t help but feel nervous.
Good news for shareholders
Wealth management platform Hargreaves Lansdown said on Friday it was making it easier for clients to exercise their shareholder rights.
They will be able to attend more easily the meetings of the companies in which they hold shares. Voting will also be easier.
About time. We’ve been asking investment platforms to up their game for years. I hope that the latecomers are now mobilizing too.