Can the UK Afford to Pay Pensions?

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Author:

David Kingman

Date:

1 March 2013

The UK government currently has almost £5 trillion worth of pension liabilities which it will have to pay in the future (£1.2 trillion for public service pensions and £3.84 trillion in respect of the state pension). Most of these are unfunded, meaning that they are largely paid out of annual tax revenues and the bill for them is being passed on to future generations because today’s government is not putting money aside to cover them.

In this study, IF asked a group of 50 of Britain’s leading thinkers in economics whether they thought this situation was tenable, or whether future governments will end up trying to reduce their liabilities in some way. Specifically, they were asked to give their views in response to the following questions:

1. According to the ONS, Britain currently has £1.2 trillion worth of public sector pension liabilities, three-quarters of which are unfunded. What do you think is the likelihood that these will be paid in full?

2. In Britain the state pension is currently paid regardless of other income and assets. However, in some countries (including Australia) it is means-tested. Do you think means-testing of the state pension is likely to be introduced before 2040?

The results – 75% of the economic experts said they did not think the public sector pension liabilities would end up being paid in full, and almost 50% said that they thought the state pension would become means-tested before 2040 – suggest that policy-makers have not yet reformed pensions sufficiently to make them sustainable, and a crisis is looming that will have a major impact on future generations.

Posted on: 14 February, 2013

3 thoughts on “Can the UK Afford to Pay Pensions?

  1. owbistoldbutt

    First off, well done with the whole IF project, I’ve enjoyed reading your reports and research!

    One of the responders mentions that “current UK fiscal policy is unsustainable” with regards to public pensions. On this topic, my greatest fear is that attempts will be made to plug the shortfall by encouraging an increased birth rate or increased inward migration. That “solution” is not only unsustainable but it actually makes for an even worse pension crisis in future.

    Whatever the real solution is, it does not involve the pyramid-scheme idea of boosting the population further. Perhaps the solution would involve investing in technology which can be applied to elderly care; cheaper care and medicine; or perhaps even fostering a culture in which older people are able to continue working part-time in less stressful employment.

    The pension crisis will be one of the greatest hurdles modern civilisation will have to overcome; we need to think very critically and tread very carefully to ensure that our chosen solution, whatever it may end up being, is sustainable.

  2. Steve King

    I’m afraid that the only solution to this is a retrospective cap/ceiling on high unfunded public sector pensions similar to that imposed by the government on other benefits. To take a percentage off all unfunded public sector pensions would just push those on low pensions sideways onto other benefits

  3. david

    state pensions are paid from an insurance paid in to over life. whether successive governments have sidelined the incomes to pay welfare to below retired age is irrelevant as it is a contract agreement under an insurance policy with the state and not a tax. To ensure that the current young are protected for their old age, the insurance should be restored to its original purpose and no tallow it to be used for anything other that what it was originally. There is evidence that incomes are paid less than fair rates and are supplemented by taxpayers. The larger organisations guilty of this boast profits in the press and bonuses at the higher levels. The current young are being disadvantaged this way and for it to continue, their own retirement and their children will be affected.

    There are too many ways for individuals to circumvent paying taxes and also large organisations. The revenue of the country is being depleted and for this to continue will burden the current young, their own retirement, their children and their children’s children. The UK does not seem to be the only country suffering this problem.

    It is not a good idea to set an example of agreeing contracts on pensions or savings only to change it when it comes to collecting the incomes. The existing contracts such as public sector should be honoured to give current generations assurance for when they invest. Where the pensions are going to be amended for new contributors it may be worth considering private investments or savings product to be offered by employers taken at source alongside the pension (guaranteed up to a limit by the government as existing savings are)

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