State pension risks: Falling birth rates and tax receipts cause for concern
Falling birth rates and a decline in National Insurance receipts could mean changes to the state pension, including around the retirement age and the level of the benefit.
The birth rate in England and Wales stood at 624,828 in 2021, according to the Office for National Statistics (ONS).
While this is higher than the 613,936 live births recorded in 2020, it is among the lowest figures recorded since the noughties.
By comparison, there were well above 700,000 births per year in the post-war era and in 1947, more than 880,000 were recorded.
According to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, the figures fall flat on the expected pandemic baby boom. But more importantly, the figures pose a risk to the state pension.
Morrissey said: “Alongside increasing longevity, it shows the fine line that needs to be trodden on state pension policy.
“With the number of older people continuing to rise there is a real imbalance when it comes to younger people in the workforce supporting a burgeoning ageing population and the sums don’t add up.
“The debate continues to rage around the triple lock and whether it’s the fairest way to uprate state pension here in the UK and we await the findings of a Government review into whether state pension age will be hiked further and faster.”
In France today, there are strikes over the Government’s plan to increase retirement age from 62 to 64 and throughout Europe, retirement ages have also increased.
Morrissey added that in the UK, auto-enrolment will help more people build a pension to see them through their retirement.
But she said: “With state pension forming the backbone of people’s retirement income, people need more certainty around when and how they get their state pension so they can plan. The time has come for a thorough review of state pension to give people a longer-term view so they can make these plans.”
Funding and affordability
A separate report from the Government Actuary published today revealed that recent changes to the National Insurance contributions (NICs) and the state pension mean outgoings will exceed receipts in each year from 2024/25 until 2027/28.
According to Aegon, this “adds fuel to the debate around whether the state pension in its current form is affordable”.
In April, the state pension will rise 10.1% under the controversial triple lock mechanism which guarantees the basic state pension will rise by the higher of average earnings, inflation or 2.5%. As it will rise by September’s inflation figure of 10.1%, some will see their pensions breach £10,000 a year for the first time.
Steven Cameron, pensions director at Aegon, said: “The state pensions being paid today are funded from the National Insurance contributions of today’s workers on a ‘pay as you go’ basis. Last year, the Government significantly increased the earnings threshold above which National Insurance contributions are paid. This was good news for take-home pay, but it meant the Government will receive less from National Insurance receipts than it would have, both this year and in future. On the other hand, under the ‘triple lock’, the state pension will be increased by a record 10.1% in April which will cost the Government significantly more, again both next year and in future years.
“The Government Actuary’s latest report shows that in each year from 2024/25 till 2027/28, receipts will be less than expenditure. While these latest figures don’t look beyond 2028, unless changes are made, the state pension looks increasingly unaffordable. While there is a very small fund to cover the shortfalls till 2028, it is declining rapidly and could run out entirely unless the Treasury steps in and pays special grants.”
Cameron added that while the Government “did honour the state pension triple lock this year, there is growing concern that granting such generous upratings in future years will simply be unaffordable, without putting growing pressures on today’s already stretched workers”.
He said: “The Government will shortly publish findings of its review into state pension age, and there’s a strong likelihood that on affordability grounds, this will have to increase beyond age 67, earlier than currently planned. These latest Government Actuary figures make changes to state pensions even more likely.”