It is common knowledge that the state pension operates as a massive Ponzi scheme. Contributions made by workers to National Insurance are not ring-fenced for their state pension. There is no retirement fund for me with the designation “Rachel’s retirement fund.” Instead, the contributions of current workers are utilized to fund the pensions of retirees.
Unlike true Ponzi schemes, there is no stealing or fraud involved here. If a private pension was managed like the state pension, with funds capable of covering barely a fraction of its obligations, the managers would be imprisoned without question.
We have an unspoken intergenerational accord. Workers contribute to the pensions of current retirees with the assumption that, when they reach retirement age, they would get the same benefits.
This is effective as long as at least as much is going into the pot as is coming out. Last week, however, the Government Actuary issued a report indicating that the days of balancing the books were numbered.
The National Insurance fund has a surplus, but a loss is anticipated for next year. Last year, these same analysts predicted in another analysis that the fund would be depleted within a decade.
There are two primary factors contributing to the depletion of the contents of the kettle. First, as the population ages, fewer individuals contribute and more individuals receive benefits. In 2085, there are projected to be 43 retirees for every 100 employees, compared to 27 in 2020.
The state pension triple lock may never return
Due to the triple lock, the state pension becomes more generous – and hence more expensive – each year. This ensures that it increases annually by the rate of earnings growth, inflation, or 2.5%, whichever is greater. The 10,1% increase scheduled for April of this year will be the greatest increase since 1991.
So what can be done to ensure future generations have access to the state pension? There are several possibilities, but none of them are particularly appetizing.
Employees may be required to pay higher National Insurance contributions. With millions of people already trying to make ends meet, however, increased taxation could be a tough task.
The government could supplement the National Insurance fund with general tax revenue. This has occurred in the past, and the Treasury must pay out if the fund falls below one-sixth of its yearly expenditures. However, increased pension expenditures could reduce funding for schools, hospitals, highways, and defense.
Instead of asking employees to pay more, alternatives involve giving pensioners less. They could include decreasing or imposing a means test on the state pension, or raising the eligibility age.
A glance across the Channel indicates that none of these solutions will be acceptable. On Thursday, almost one million French citizens participated in rallies against plans to raise the retirement age from 62 to 64.
I believe this challenge will be resolved in a variety of ways in the next decades. I believe it is inevitable that a government with a large majority will eventually find a reason to break the triple lock. Once broken, I doubt it will return.
NI fund may run out in a decade
Second, I believe pension guarantees will be modified in the far future. People in their 20s and 30s are less inclined to take to the streets to protest pension reforms that won’t affect them for decades compared to those who are near retirement age.
On page 65 of Wealth & Personal Finance, Sarah Davidson, a reporter, explains how to get the desired retirement. She recommends that younger workers ensure they are not unduly reliant on the state pension in retirement. It may not always exist in its current form.
The estimates indicate that the state pension fund will be depleted a decade before my retirement. I am unable to avoid feeling twitchy.
Shareholders should be pleased with the news.
Hargreaves Lansdown, a wealth management platform, announced on Friday that it was making it easier for clients to exercise their shareholder rights.
They will be able to attend meetings of companies in which they hold shares with greater ease. Also, voting will be simplified.
It’s time. Investment platforms have been urged to improve for years. I hope the stragglers will now also step up.
