UK pension deficit is £5 trillion
Who pays for the pension shortfall?
01 Jun 2018 - Estimated reading time: 3 mins
In my new years’ resolutions blog I said that we – the generation of the gold plated pensions - owe it to the next generation to create an equitable and sustainable way of providing for income in retirement. Recent headlines have again brought this into stark focus.
The latest numbers show that the UK has accrued pension liabilities of £7.6 trillion – rights that have been built up in the past but not yet paid. There are assets of around £2.7 trillion invested to cover that bill so the shortfall is c£5 trillion. The biggest chunk of this is the State Pension which accounts for (currently) £4 trillion of the total. The other £1 trillion relates to commitments accrued in unfunded public sector pensions. This is the bill that needs to be paid to cover the shortfall from the past, which will have to be met by the workers of tomorrow. And of course we know that those same workers also have to worry about saving for their own pension, paying off education debts and struggling to get onto the housing ladder.
It is worth considering these massive numbers in a wider context. Public sector debt is c£1.7 trillion at present. Total public spending is c £780 billion of which we spend c£155 billion each year on pensions (c20%), which is the single largest item of public spending, marginally more than we spend on healthcare. Interestingly the amount of interest we pay on our debt is equivalent to roughly one third of the amount we spend on healthcare. Total taxation receipts in 2016/17 amounted to c£570bn which is equivalent to c30% of GDP. That percentage has been either side of 30% for the last 35 years or so.
We are told that stronger economic growth will help to ease this burden. That is of course true, but there are many demands on the public purse beyond pensions, and we have a massive pile of debt to pay off in addition to the pension debt described above and the shortfall in future pensions that is building up every day.
So what is the answer? What I do know is that we are long overdue a serious grown-up debate on this, and I can throw in some questions to kick off that discussion:
- Is 30% taxation enough to repay past debts and meet current and future public spending requirements?
- If the answer is no, what is a fair and equitable way of increasing taxation?
- If we are not prepared to increase taxation, what does life look like for the population in a good, average and bad future economic growth outlook?
- What is the most appropriate future balance between all the spending demands? NB - By this I don’t mean how much can each Government department persuade the Chancellor to give them, I mean what value do the general public put on each component and how would the people spend the money given the choice?
- What is an equitable balance between the State, employers and individuals in terms of saving for retirement?
I am sure political parties all think about these issues, but the problem is that their answers then get bogged down in political in-fighting and persuading us to vote for them, rather than any collective examination of the common good. Surely these issue merit at least an attempt at putting political differences aside and seeking a long term sustainable solution?
Not for me, not for us but for our children and their children.
This blog originally appeared in Pensions Expert.