State Pension could become unsustainable by 2035, says Adam Smith Institute

The Adam Smith Institute (ASI) has built a new dynamic model indicating that the State Pension could become fiscally unsustainable as early as 2035. This point of unsustainability is defined as when the state spends more on welfare payouts, primarily the State Pension, than it receives in National Insurance tax receipts.

The ASI attributes this growing unaffordability to the ‘triple lock,’ which guarantees that the State Pension rises by the highest of inflation, average earnings, or 2.5% each year. In 2021, the State Pension’s total obligation was £8.9 trillion, three times the UK’s current GDP. This figure is expected to increase due to the triple lock.

The State Pension is funded by current tax revenues rather than a dedicated fund built up during a person’s working life. For example, the average person born in 1956 will receive £291,000 more than they contributed, creating an economic burden on the working-age population.

This issue is exacerbated by demographic trends. By 2040, 22.7 million people are likely to be claiming benefits, including the State Pension, while only 34 million people of working age will be available to fund it.

The ASI’s model incorporates demographic data, State Pension contributions, workforce participation, and aggregate pay. It predicts that the State Pension could become financially unsustainable by 2035, meaning welfare spending would exceed National Insurance tax receipts.

Maxwell Marlow, report author and director of research at the Adam Smith Institute, calls for urgent reform of the State Pension. He suggests options such as means-testing the State Pension, transitioning to a ‘double lock’ or smooth earnings link, or adopting a Swedish-style pension system.

Maxwell Marlow said: “It should alarm us all that the state pension could become fiscally unsustainable within the next 10 years.

“Working-aged people are already taxed to the hilt in order to universally subsidise pensioners, and this inherent unfairness within Britain’s economy will only become more entrenched as our demographic deficit worsens.

“The government should look to review the state pension as a matter of urgency, either through means testing so that those with a net worth of more than £1 million are ineligible, or by moving to a double lock system to avoid the destructive ratcheting we see today.”