New State Pension funding 'equilibrium'

j.p

Nothing to see here, move along.

chiefie

The system hasn’t been designed to be in equilibrium. We also pay about half what some other countries do (%gdp) for this benefit

Dox

What's it matter if it's in 'equilibrium'? NI contributions pay for more than just your pension. 

squirrelpie

Dox said:

What's it matter if it's in 'equilibrium'? NI contributions pay for more than just your pension. 

I think you misunderstand (assuming I DO understand, of course ) The thesis of the OP is that NI payments do not pay anything like enough to pay for the State Pension, let alone pay for anything else as well.

I'd still say 'what does it matter' myself. There's a black art in plucking the geese with the least amount of hissing!

Zanderman

j.p said:

I was trying to determine what's the state of 'equilibrium' for the New State Pension fund overall, one in which contributions and pay outs are matched roughly (assuming for this purpose there are no costs to running the scheme).
Ignore for the moment the effect of inflation and assume they're all present values.  Inflation or deflation taken out of the equation to simplify it.
It seems to me that with weekly NI top up rates at £15.30, and the full State Pension rate at £175.20, thirty five years of contributions at that rate (about £28k) would buy just little over three years' worth of pension.
But if that was so, and contributions were in 'equilibrium' with pay outs, it'd mean that the average person only draws their State Pension for three years of their life before they die, and that figure seems a bit meagre to me.  Could that be true?
By the way, I'm not just talking about all those who reach State Pension age, no.  I'd be prepared to include in the average those who never reach it and yet they have contributed plenty (unwillingly contributing to the scheme for the benefit of others).  But even taking them into account, just three years does seem low.
And I could count all those who contribute for longer than 35 years -- but then I don't know exactly what the average years-of-contribution is.  And even assuming they do a third more (they contribute ~47), that won't buy but an additional forth pension year paid out of the fund.
Or else, if the average person does draw their State Pension for longer than three years or four, then the average worker's contribution (and his employer's) is on average greater than NI top up rate, though in this case I'd be asking, why is the top up rate set as this level and not higher?  Or presumably those funding their pensions through contributions pay less into the fund than those doing it via deductions from work, and that could be unfair.
Or else, the system is not in 'equilibrium'.
What is your view?

I'm not sure what your question is - your figures clearly show that the state pension that is given is not in equilibrium with the NI contributions people have made (yes, obviously, most people live longer than 3 years after SP age!)
That's not in any doubt. 
This isn't a new phenomenon - it's been like this for a long time - and hopefully will be for a long time to come.
My view? 
Best not to question these things and just be grateful for them.

Linton

I don’t understand the OPs point. The top-up rates are for class 3 voluntary NI. Surely most working people pay more than that in NI. Plus many people pay more NI than is required for a full SP and so would never need to pay voluntary NI and there is the effect of more SP means  lower cost of benefits.

mark55man

I think the OPs point is ( as suggested by later posts) - just how good value the state pension is, and largely when people say they have earned their pension - it may be true from a welfare perspective but not strictly financially.

Broadly - I took the question in two ways (and here assuming NI is ALL about the pension, if not then the pension benefit is relatively even more valuable)

* Assume someone works and earns a full pension - then how long into retirement will they have received enough to "recoup" the money paid via NI - obviously variation in salary, and assumptions about annuity equivalents
* Then adding up over the various cohorts (eg those who don't work, those who die), for a given year of birth when would that cohort have spent the NI collected on their behalf

As a final step if you then added up the numbers over all the people currently receiving pension you will get a feeling for how far the equilibrium is or is not in place.  

I was interested so did some playing around with calculators:

Something like assume an inflation linked single person annuity is about £3-4K at the moment, implies to buy the current full state pension income stream (£9K) at age 65 would cost in today's money between £250K and £300K. To gain each years entitlement to that you would (if earning between LEL £120pw and Primary threshold £180pw)  have paid nothing.  If earning at half way between LEL the UEL (£570 per week) you will have paid in = 12%*(£570-£180)*52 = £2.4K pa.  If earning at UEL (about £50K) you will have paid in about £5K in NI

A quick play with calculators indicates £2.4K a year (from £570 a week is £30K which is near average income) over 45 years in a DC scheme would result in a pot of £200K in future money or enough for about 40% of the state pension in future money (2% inflation)

I do apologise for going on a bit - and I am sure there are holes in my logic and maths, but I think its clear that the benefit received is way way in excess of what the majority of people will have paid into it. Therefore the equilibrium is not in place from NI and most pension will be paid from general taxation, even at the current low level of pension.  Just to be clear I don't have a problem with that, but it does make me wonder how more generous schemes are funded

Linton

Working out viability by using an inflation linked annuity as a comparison isnt really valid.  Commercial inflation linking is expensive whereas the government gets inflation linking for free as it pays for SP out of current income and its income is automatically inflation linked (or more so!).  What matters is cost now ands income now and how this will change because of demographics.  Any serious long term shortfall could be fixed by increasing SP age.

GunJack

...and many of us will have qualified for full newSP whilst still having 15 yrs to work & contribute before collecting it....and all those who will have contributed for many years but have died before collecting....and..and...
the point being there's so many factors that need taking into account, which is why actuaries are employed to do the hard sums

eskbanker

Average annual NI contributions are circa £4K per working person, based on two published statistics:

Working population is roughly 33 million

Aggregate National Insurance contributions are about £137 billion

Linton

eskbanker said:

Average annual NI contributions are circa £4K per working person, based on two published statistics:

Working population is roughly 33 million

Aggregate National Insurance contributions are about £137 billion

And the cost of the SP for the year ending March 2019 was £95.5Bn.