I have read plenty of badly informed articles, with some saying pensioners must keep the triple lock on the state retirement pension as the pension is still low, and from those saying the best test of a government’s serious intent to control the benefit bill is to ask them to remove the triple lock. They mainly assume the state pension is just a universal benefit and see it as a contest between the generous and the mean, between the high spenders and the controlled spenders. In practice is not that easy, as the pension is a contributory benefit or an entitlement earned by making NI contributions over a lifetime. People get different levels of pension based on their contributions, and the NI fund has to balance the tax in with the costs of the contributory benefits paid.

The reformers often have no idea what they are reforming. If for example a government said it would remove the option of a 2.5% increase in a year of low inflation and low wage growth, it would make little difference to the long term costs given the UK tendency to higher inflation. If it removed the wages link there would be savings so pensioners would be worse off, but it would also break the promise of what is a contributory scheme. If someone does not pay in for enough years they get a lower pension. If someone was paying in for a private pension they paid lower NI and get a lower state pension.

The National Insurance Act 1946 and National Assistance Act 1948 as amended by the Social Security Act 1992 and 1999 is the governing law. These lay out that all the National Insurance Contributions are paid into a fund. Under the 1992 Act Ministers have to set contribution rates of NI in relation to “the general level of earnings, the balance on the Fund and payments expected to be made from it in future.” The Government Actuary has to report on the impact of upratings on the fund. This government decided in its first budget to make a large increase in NI presumably taking into account the upratings it awarded.

The last accounts for the Fund to March 2025 show that the fund received £130.9 bn in NI contributions that year with other income of £7.3bn, primarily interest on investments. It paid out £143 bn leaving an annual deficit of £7bn. That left it with a balance for future payments of £79bn. It needs to keep a cash reserve to make payments on a continuous basis. The main contributory benefit paid out was the pension, at £136.9bn. There was a £5bn payment for contributory ESA and £200m for contributory JSA. The Fund also covered the modest costs of the Pensioner Christmas bonus. The next report may show the extra NI paid has created a surplus.

Of course a government with a majority could repeal all the legislation and say that NI is now simply a general tax not giving people any right to a State pension. They could then legislate to make the State pension a normal benefit, with means testing or still available to all regardless of income. It could become a universal benefit which you got whether you had worked and paid NI or not. Means testing it would be robbing people of the pension they have paid in for over any years of paying NI under the Contributory system.

The best way to control the costs of the pension without having to tear up the contributory principle, abolish the Fund and upset many pensioners is to increase the age at which you can draw the pension. Each year of increase in the age saves roughly 7% of the cost. The current pension age is 66. It will rise to 67 by 2028. Legislation says it will rise to 68 by 2046, but governments have announced their wish to bring this forward to 2039. It would make sense to legislate to get to 68 by say 2035 and to 69 by 2045 to increase the savings. People who still want to retire earlier than these later ages should have an option to pay additional NI contributions into the Fund in their later years in employment to buy themselves a full State pension at an earlier retirement age. Alternatively they could retire earlier with a lower State pension where they had private pension or savings so they did not need to claim top up benefits.

John Redwood's Diary

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