Qualification for the two-tiered state pension in the United Kingdom depends on having a ‘complete contribution record’. That means, an individual (or spouse/partner) must have made the separate ‘National Insurance Contributions’ (NIC) to the ‘National Insurance Fund’ for a minimum period to qualify for any state pension and for a maximum period to qualify for the full entitlement.
Separately, employers have also made NICs for their employees. Those have had no direct bearing on the entitlements of individuals.
The Fund covers pensions but also about 19% of collections (2012/13) are allocated to the National Health Service. It operates on a largely PAYG basis but its assets (£29 billion in 2012/13) are entirely in government bonds. The assets are about 28% of the amount the Government Actuary projected in 2009 (£103 billion). To put those numbers into perspective, total NICs for 2013/14 were £110 billion in 2012/13 so assets were just 26% of one year’s collections.
From 2016, the pensions change (Pensions Act 2014). Rather than being at Tier 1 (flat-rate) and Tier 2 (earnings-related), there will be a single Tier 1, flat-rate pension. At least 10 ‘qualifying years on the National Insurance record’ will be needed to receive any pension with the full pension payable only after 35 years.
The latest (2014) projection from the Government Actuary out to 2075 suggests that the National Insurance Fund will be exhausted by 2035/36 but the report suggests this is a serious underestimate. This is not, however, the reason for recommending the abolition of NICs.
Both individual and employer contributions should be merged into the income tax system. The report cites, with approval, the 2011 Mirrlees Report:
“National insurance is not a true social insurance scheme; it is just another tax on earnings and the current system invites politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income. The two systems need to be merged.”
The report suggests a number of reasons for the proposed change:
- Simplification: a single tax on earnings would replace “a staggeringly complex system, with some 60 categories into which employees may fall”;
- Transparency: the tax burden on earnings would be more transparent “which can only be beneficial in a democratic society”.
- Fairness: NICs are inherently regressive – abolishing them would “provide an opportunity for a more informed public debate about what a “fair” differential should be between low and high earners…”
Any shortfalls over what is politically acceptable by way of income/corporation tax increases should be collected through increases in expenditure tax (VAT). The overall tax burden will not be affected by the proposed change but its incidence will be.
PensionReforms agrees with the report’s overall recommendations. Though a case can be made for separate contributions, PensionReforms thinks that adds to complexity without a clear pay-off in benefit security. So, anything that reduces the current complexities in collections should, in principle, be welcomed. The upcoming simplification in the pension itself is a good start but the job needs finishing.
Then the UK might turn its attention to the still generous tax breaks savers get on retirement income provision. (File size 560 KB; 16 pp) 720