New research from Guiide, the free retirement planning platform, reveals that the UK’s State Pension system faces growing pressure from shifting demographics, warning that the sustainability of the current state pension system depends on retaining and supporting the nation’s younger workforce.
The study highlights that the number of working-age people supporting each pensioner will fall sharply over the next 25 years – from 3.5 workers per pensioner in 2025 to just 2.2 by 2050. This demographic shift, driven by a declining birth rate and an ageing population, will significantly strain National Insurance (NI) contributions, which fund the State Pension.
As the research explains, “the age demographics of the UK will naturally change over the next 25 years, based on low birthrates alone.” The study notes that the UK’s birth rate has been falling steadily since 2012, reaching 1.4 children per woman, far below the 2.1 needed to maintain a stable population.
Because the State Pension is paid from current contributions rather than a fund, this changing population balance poses a direct fiscal challenge.The report states:
“Currently there is an excess of NI contributions over NI based benefits. The ratio of benefits to contributions is around 77%. In 2050, based on the above demographic changes alone, any excess is very likely to be gone, meaning tax rises will be needed and a higher burden placed on workers.”
Immigration of higher earning workers may help to slow the effect. However, the authors caution that no one appears to be considering what may be the greatest risk. This is the steady emigration of young, higher earning, mobile workers from the UK. As the research explains:
“If 100,000 younger (21–40) working people a year in the top 30% of their age earnings decided to emigrate, this would increase the tax burden on those remaining materially.”
The researchers warn this could trigger “a self-fulfilling spiral of further emigration, higher tax burden on those remaining, further declining birth rates, more emigration” over time.
The report concludes that “from a policy perspective it seems everything should be done in the next decade to encourage younger workers to remain in the UK and have larger families where possible.
A key policy to provide this would seem to be allowing both people within a couple to undertake work if wanted without overbearing childcare costs, making it uneconomical to do so.”
