The Institute of Economic Affairs has proposed a solution to the ever-growing pension bill which would turn taxes and pensions on their heads
The IEA said that the Treasury was ‘overstretched’ and the cost of paying for British pensions would soon be ‘unsustainable’ as the number of pensioners grows and they live longer.
The body wants the Government to scrap the new flat-rate pension which is said to be worth around £155 a week for those with enough years of National Insurance contributions.
Instead, it advises that the state pension should only be worth around £75 a week and workers should be given tax rebate each year – the value of which would depend on their age.
The rebate which could be raised by paying less National Insurance, would then be used by the individual to save into a personal or workplace pension scheme.
Chairman of the IEA, Phil Booth, said the current system for paying state pensions was ‘overstretching the public purse’ and he raised concerns about how long the Treasury would be able to continue paying out pensions to an age group whose numbers are swelling due to the Baby Boom generation and people living for much longer.
He claims that paying lower taxes would encourage more saving, particularly into private pension schemes.
The IEA suggest that a worker should be able to ‘opt out’ of paying National Insurance in return for a lower state pension pay out in retirement, which is similar to the present scheme were workers can opt for paying lower NI contributions but will forego their rights to any top up pension payments after the current basic pension of £113.10.
The current system of opting out will be abolished under the state pension reforms which come into effect in April 2016, which means that many workers will find they don’t qualify for the full single-tier pension because they haven’t paid enough National Insurance over their lifetime.
It has been estimated the cost of paying out state pensions will rise to £420 billion a year by the 2060s, four times more than the present cost.
In response to the proposal the Department for Work and Pensions has stressed that funding for state pensions remains strong.