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5% rise in NI to plug the state pension funding gap?

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The latest government projections suggest that a 5% hike in National Insurance Contributions may be necessary to keep the fund - used to pay out state pensions - in credit over the long-term.

The National Insurance fund could be exhausted by 2032. The latest report, done every five years, stated: “Benefit expenditure is expected to exceed National Insurance Contribution receipts by an ever-increasing amount, equivalent to around 1% to 1.3% of GDP.”

The problem is primarily caused by increasing life expectancy, which is creating an increasing number of pensioners versus those of working age. It said changes to the state pension age will go some way to mitigate this. The New State Pension, which is higher than the old one, will also increase the burden on the fund, as will the ‘triple-lock’ policy.

However, the Government Actuary’s Department, which completed the report, said that the position was similar at the last review, as at April 2010.

Alternatives to raising National Insurance Contributions include raising the state pension age, cutting the value of the state pension, or reducing spending.

Tom Selby, senior analyst at AJ Bell, said: “The latest analysis from the government’s own actuary paints a grim picture for the future of the state pension. The harsh reality is that, as demographics bite and the Baby Boomers flood towards retirement, the cost of the state pension will inevitably balloon.

“In fact the Government Actuary predicts the fund used to pay out benefits will be exhausted in around 15 years’ time, at which point the Treasury will have to step in to ensure people continue to receive their state pensions.

He said the Treasury grants will kick in at £11.6bn a year in 2030 and increase rapidly to £151bn by 2060 and £482bn by 2080 if the current system remains in place. He added: “Make no mistake – if this nettle is not grasped today, it will be forced on policymakers tomorrow.”

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