The British government’s national insurance piggy bank is nearly exhausted and could plunge paying the state pension into crisis, according to a think-tank report.
The state pension is paid out of the National Insurance Fund, which, says the study, has been gradually draining away since the downturn.
Statisticians in the Government Actuary’s Department (GAD) had worked out the depleted fund should last until around 2035, but the vault could be empty a lot sooner if the savings are continue to be spent at the current rate.
According to the Centre for Policy Studies, the fund has dropped from £53 billion in 2009 to just over £29 billion in 2013.
In the report NICs: The End Should Be Nigh, the centre argues the fund could be empty in just 12 months.
Scrap national insurance call
Report author Michael Johnson writes: “It’s inevitable the fund will soon be exhausted. The government should let the next generation know they are unlikely to receive any state pension and should base their retirement planning around not receiving anything.”
Johnson also writes that national insurance is too complicated and a financial millstone for many companies.
As a result, the centre is recommending national insurance should be scrapped and replaced with a single earnings tax set at three rates – a 32% basic rate, 42% higher rate and 47% top rate.
These rates are calculated by combining income tax and national insurance on salaries.
“If the taxes collected are not enough, the government should raise other taxes on consumer spending and companies,” said Johnson.
Low wages drain fund
The fund collects national insurance payments from employees and businesses, plus interest from investments mainly in government gilts.
The money paid out goes to state pensions, some social security benefits and towards funding the National Health Service in England.
GAD had estimated the fund would have a surplus of almost £115 billion in 2012, but made a mistake in the calculations, which is why the actual surplus sank to £29 billion.
The current value of the National Insurance Fund is published online by the UK Debt Management Office.
The government has similar financial problems with national insurance as income tax. Although employment is improving and more people are in work, the amount of income tax and national insurance is not increasing as much as anticipated because workers are earning less.
This affects projections, as the fund projections are based on predicted contributions from wages.