Britain’s state pension could become financially unsustainable as early as 2036, despite recent increases in National Insurance contributions, according to new modelling by the Adam Smith Institute (ASI).
The think tank warned the Treasury is on course to spend more on welfare payouts than it receives in National Insurance receipts within just over a decade.
This tipping point, the ASI says, marks a “fiscal crisis moment” – where the system becomes structurally dependent on reserves from the National Insurance investment fund rather than current tax income.
Tax rises ‘only bought a year’
In its updated dynamic fiscal model, which factors in demographic shifts, workforce participation and national pay data from bodies including the ONS and HMRC, the ASI found that national insurance hikes had extended the system’s lifespan by just one year – pushing its insolvency threshold from 2035 to 2036.
« The latest analysis shows we are taxing workers and firms harder, and suppressing growth, just to keep the State Pension alive for one more year, » said Maxwell Marlow, director of public affairs at the ASI.
« It should alarm us all that such drastic action produces such a marginal result. »
Employer National Insurance contributions were raised to 15 per cent in April, as part of chancellor Rachel Reeves’ wider £40bn tax package announced in the Autumn Budget.
That move was intended to stabilise the UK’s public finances, but it is now drawing criticism for placing a disproportionate burden on working-age Britons while offering little long-term fiscal payoff.
A triple lock
The think tank has again called on the government to suspend the state pension’s so-called ‘triple lock’ – a mechanism that increases pensions annually by the highest of inflation, earnings or 2.5 per cent.
The policy has been described by economists as fiscally “ratcheting” and increasingly unviable in an ageing society.
In 2018, the total lifetime liability of the welfare system – of which the state pension is the single largest component – was £8.9tr, more than three times the UK’s GDP.
That figure is now forecast to grow even further as the population ages.
“The triple lock is a political luxury that the Treasury simply cannot afford,” Marlow said.
“We are moving towards a system where today’s workers are funding yesterday’s benefits, and it cannot hold.”
Demographics point to structural imbalance
The warning comes amid rapidly shifting demographics. By 2040, around 22.7m people will be eligible for state benefits including the pension – with just 34 million of working age to fund it.
That compares with a far more sustainable dependency ratio a generation ago.
Figures show that the average person born in 1956 will receive £291,000 more in pension and benefits than they contributed via National Insurance, highlighting the intergenerational imbalance at the heart of the current model.
From 2036, the government will need to draw on reserves from the National Insurance fund to cover welfare deficits. But those reserves will begin to shrink by 2040 as deficits exceed investment income.
Fiscal pressures mount amid fragile economy
The ASI’s warning adds to growing concerns over the UK’s long-term fiscal position, especially as Reeves faces a widening funding gap following a government U-turn on welfare reform.
Analysts at Deutsche Bank have cautioned that tax revenues may come under further pressure if employment levels fall and growth stagnates.
Meanwhile, HSBC has warned the UK risks entering a “doom loop” of high taxes and low growth, particularly if bond yields remain elevated.
The Office for Budget Responsibility has said future governments may need to re-examine long-term liabilities like the state pension if public spending pressures continue to build.
Despite the pressure, the Treasury has not signalled any change in its commitment to the triple lock.
A government spokesperson said: “The State Pension remains the foundation of support for millions of people. We’re committed to ensuring it is sustainable for future generations.”
But with working-age taxpayers already under strain and economic growth still subdued, economists and business leaders are increasingly calling for structural reform.
