SCOTLAND, it seems, is cooling in its support of free movement of people.
Earlier this week the National Centre for Social Research’s Sir John Curtice revealed that a majority of Scots – 59 per cent – want the UK to leave the European single market and restrict immigration for EU citizens as part of the Brexit deal.
“Contrary to the presumption of the Scottish Government, most voters in Scotland are not keen to see Scotland remain in the single market and thus continue freedom of movement, should the rest of the UK leave it,” the study said.
For anyone hoping to receive a state or public sector pension this could prove shortsighted.
You see, contrary to popular opinion, while everyone who pays enough national insurance is entitled to a pension from the state, there is no pot of money accumulating with your name on it.
Instead, today’s pensioners are being paid out of this year’s national insurance take, with every retired person in Scotland currently being supported by payments taken from three working people.
Key public sector pension schemes, such as those for NHS staff, teachers and civil servants, work in the same way, with retired workers’ pensions being paid out of their former employer’s current income. And where does that income come from? Working people’s taxes.
The problem is that as the proportion of people above retirement age is growing faster than the proportion under it – and in Scotland the issue is more acute than in the rest of the UK – we are moving swiftly towards an imbalanced system.
“Whenever you get a pay as you go approach you find that one sector of the population is relying on another sector to fund it,” explained Steven Cameron, pensions director at investment company Aegon.
“This applies to the state pension – those of working age pay national insurance to fund those above state pension age.
“In unfunded public sector schemes the money needs to come from taxation to pay for the government liabilities. This means the younger generation pays for the older generation’s pensions.
“If anything happens that changes the demographic make-up of the population it could have significant implications for the viability and sustainability of unfunded pensions.”
Even without Brexit potentially diminishing the UK’s labour pool, the state pension is heading towards a funding crisis.
Earlier this week the Government Actuary’s Department (GAD) said that while the annual national insurance take is expected to increase until 2025 as a result of women’s retirement ages increasing to 65 this year and the state pension age for men and women rising to 66 by 2020, by the mid-2030s it would not be enough to cover the benefits it pays for.
“If the system is to continue to cover the current form of state pension and other benefits, then either the fund’s income has to rise or expenditure has to be controlled,” said senior consulting actuary Martin Lunnon.
While the GAD has said that increasing the amount of national insurance paid by workers would be one way of covering the shortfall, John Wilson, head of technical at advisory business JLT Employee Benefits, believes the action may have to be more extreme.
“These funding problems have been an uncomfortable truth for many years and we could be heading to big hikes in income tax rates,” he said.
“If nothing else changed we could see the basic rate of tax going from 20 to 25 per cent and national insurance going up by five percentage points too.
“Nothing is palatable and nothing is going to be easy for any government to try to explain and sell to the electorate.
“Some of the things we could be looking at are a universal change in the whole state pension concept. The state pension has so far been universal but it could become means tested.”
For the vast majority of people this matters, particularly as research from the Pensions Policy Institute found that the poorest pensioners rely on the state pension – which currently pays just under £8,300 a year – for 78 per cent of their income.
Regardless of what happens to free movement as part of the final Brexit deal, as the 2030s are just 12 years away, action has to be taken now to safeguard the incomes of future generations of retirees.
Yet, as Mr Wilson said: “Where’s the appetite to make any changes now? With so much focus and so many resources devoted to Brexit at the moment unfunded pension liabilities in the state and public sector will sit in the too difficult box for too long.”
Source : HeraldScotland