Health Secretary Wes Streeting says that the changes to the Welfare Bill will ‘give people peace of mind’. Perhaps for some, but certainly not economists. Britain’s welfare crisis is staggering – £313 billion a year is spent on disability payments, Universal Credit, winter fuel payments, Motability, child benefit, and, most expensive of them all, the state pension. Currently, the state pension costs over £150 billion a year, and is engineered to grow at the highest of either inflation, wage growth, or 2.5 per cent. When you factor in our rapidly aging population, the welfare state is quite literally primed to blow.
Whitehall is on a collision course of its own making. The government must act now to avert disaster
The Adam Smith Institute, of which I am a part, likes to keep an eye on the state pension. And, when we conducted our latest analysis, we were horrified at what our spreadsheets told us.
Our finding: by 2036, the state pension will be paying out more than it receives in National Insurance contributions. From that point onwards, it will rely on the National Insurance Fund Investment Account , which invests surplus funding back into the economy, to close the deficit. From 2040 onwards, the Fund will begin to deplete.
This is despite the highly damaging Employers’ National Insurance contribution rising last year. As the government has gutted its Welfare Bill, which would have only saved a lowly £5 billion, a key question arises: how do we pay for this staggeringly expensive arm of the state? The pool of workers and taxpayers will soon start shrinking, productivity is still low, and the bill keeps growing.
Having run the numbers, I feel like an engineer sitting in the control room of reactor number 4 at the Chernobyl nuclear power plant. The control panel is lit up like a Christmas tree, alarms are blaring, and while my eyes glance at the emergency stop button of abolishing the Triple Lock and means-testing, the grey-haired managers reprimand me for acknowledging its existence. We know what is coming, but there is no appetite to do anything about it.
By 2037, if nothing has changed and the situation is really as dire as our numbers show, the question will come why nothing was done. As in Chernobyl, the lines will follow: ‘Comrade, a major European state pension system cannot explode. Can you explain how it would explode? No. Because it’s impossible. It can’t.’
Readers may think me melodramatic, but the consequences of the state pension system breaking would be catastrophic. Pensioner poverty would rocket, bond markets would freak out, and the UK’s largest voting bloc would strike their ballot papers with anger and volatility. And that is not even mentioning the workers who, after decades of paying in, would find that their contributions had vanished into thin air.
The British state pension system is not fit for purpose. Politicians are aware of this, but they are too scared to do anything. Our calculations factored in inflation, employment, wages, age, and how much national insurance may rise or fall – the trajectory is as clear as day, but no one is doing anything to shift course.
In 2023, Mel Stride, the then DWP Secretary of State raised concerns about the sustainability of the triple lock, but nothing was done to correct it. In their ill-fated 2024 general election campaign, the Conservatives even proposed creating a Quadruple Lock (named, confusingly, the Triple Lock Plus) which would have raised the personal allowance in accordance with increases in the state pension. No wonder young people deserted the Tories! One Labour minister, when I asked about the state of the state pension system at a dinner, simply put their head in their hands; they feel that they cannot escape the coming collapse.
Sure, the government could print more money, but the inflation from this would push the outgoings up. They could borrow more, but with debt interest at £111 billion a year and growing, that doesn’t seem feasible. They could raise taxes, but as Spectator readers are keenly aware, Britain is already taxed to the limit. The only options are deep rooted reform and changes to tens of millions of household financial plans (including radically raising the state pension age), or letting the whole thing go up in smoke.
Whitehall is on a collision course of its own making. The government must act now to avert disaster. This is not a drill.
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