The UK’s state pension system faces mounting pressure as rising life expectancy and an ageing population threaten its long-term sustainability. Without major reforms, experts caution that future generations may be forced to wait until 80 to claim their pension or face significantly higher National Insurance contributions.
According to the Office for Budget Responsibility (OBR), the state pension currently costs around £138 billion annually, or 5% of the UK’s GDP. But new analysis suggests that this figure could increase sharply over the coming decades, leaving policymakers with limited options to keep the system solvent.
Rising Costs Put Pension System Under Strain
The OBR’s latest report projects that the cost of the state pension could reach the equivalent of 7.7% of GDP by 2073, driven by the triple lock mechanism and demographic changes. This figure translates to approximately £200 billion in today’s terms.
However, Jack Carmichael, of consultancy Barnett Waddingham, has warned that these forecasts may underestimate the financial challenge. He told that if life expectancy improves faster than expected, the cost could increase by an additional £8 billion per year.
“Keeping the cost at a similar proportion of GDP would then require a massive increase in the state pension age, potentially up to the dizzying heights of 80,” Carmichael said. He also noted that without such changes, employees might need to contribute 50% more in National Insurance to fund future pensions.
The International Longevity Centre has previously argued that raising the state pension age to 70 by 2040 may be the only way to preserve the balance between workers and retirees. Meanwhile, analysts at the Adam Smith Institute have said the system could become fiscally unsustainable as early as 2037 if no action is taken.
Pressure Mounting for Government Action
The government has already committed to a state pension age review, required under the 2014 Pensions Act. This review will include two independent reports examining the long-term affordability of the system and whether further increases to the pension age are necessary. Chancellor Rachel Reeves has ruled out increasing National Insurance during this Parliament, but the OBR has warned that the fiscal pressures cannot be ignored indefinitely.
“Even if the central projection is correct and state pension spending hits 7.7pc of GDP, the cost is still going to increase by almost half in today’s terms. That’s completely unaffordable.” Carmichael added.
Think tanks and economists continue to debate potential solutions, including means-testing and structural reforms to how the pension is funded. According to the OBR, these decisions will be critical in the coming years as the government faces the challenge of supporting a rapidly ageing population without placing an excessive burden on younger workers.
