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Warning over 'unsustainable' state pension scheme

Think-tank Reform Scotland said population projections should serve as a "reality check".

Economy: The number of people over state pension age in the UK is expected to grow by a third between 2017 and 2042.
Economy: The number of people over state pension age in the UK is expected to grow by a third between 2017 and 2042. Kirsty O'Connor/PA

Politicians have been urged to show "moral and political" leadership by overhauling the current "unsustainable" UK state pension scheme.

A report by the Reform Scotland think-tank said population projections, which show a significant increase in the number of pensioners over the next 25 years, should serve as a "reality check" to all parties.

The organisation has highlighted its own proposal - the Pensions Guarantee - ahead of the publication of the Budget on Wednesday.

Official statistics show the number of people over state pension age in the UK is expected to grow by a third between 2017 and 2042, from 12.4m in 2017 to 16.9m in 2042.

Reform Scotland said the ageing population, which is growing at a faster rate than the working-age population, means the affordability of the state pension in its current form is unsustainable.

The state pension age is currently 65 for men and is gradually increasing for women from 60 to 65.

It is due to increase again for both men and women over the coming years, with the UK Government setting out proposals to increase the age to 68 between 2037 and 2039.

At present, payments are funded through National Insurance contributions but the rules over entitlement were changed from April 2016.

'Politicians of all parties have been engaged in a conspiracy of silence about the state pension for too many years.'
Alan McFarlane

The UK Government said these changes were designed to simplify the system but Reform Scotland has argued it should be overhauled completely.

The think-tank's proposal for a Pension Guarantee, first published in 2014, would see National Insurance phased out and replaced by a compulsory system where individuals pay a percentage of their salaries into a defined contribution scheme.

Under this scheme, individuals would own their own pension pot and choose when to draw it.

The system would also mean people would know exactly how much money they had for retirement while future generations would be relieved from "the burden of funding current pensioners", Reform Scotland said.

To avoid poverty in old age, a means-tested minimum guaranteed income should be provided along the lines of the pension credit, it added.

Reform Scotland chairman Alan McFarlane said: "Politicians of all parties have been engaged in a conspiracy of silence about the state pension for too many years.

"The reality is that National Insurance is nothing more than income tax with a nicer name.

"Current taxpayers pay for current pensioners and have done so since the invention of the state pension.

"It is simple logic that as the number of pensioners increases at the same time as the number of taxpayers decreases, something has to give."

Mr McFarlane claimed Reform Scotland's Pensions Guarantee is fairer as it gives people certainty.

He added: "It is fairer for taxpayers because they are able to contribute towards their own retirement rather than paying for the retirement of others.

"Most importantly of all, it provides a solution to the problem of fewer taxpayers paying for more pensioners."

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