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NICs: The End Should Be Nigh

The state pension system is on the verge of a funding crisis. The National Insurance Fund has been draining rapidly since the financial recession – shrinking from £53 billion in 2008-09 to £29.1 billion in 2012-13. The Government Actuary’s Department (GAD) recently forecast that the National Insurance Fund (the Fund) will be exhausted by 2035-36, but could run out much sooner.

In a new report NICs: The End Should Be Nigh published on Monday 13 October by the Centre for Policy Studies, author Michael Johnson reveals that Fund exhaustion could occur as soon as next year.

Johnson warns:

“Given that exhaustion is inevitable, the next generation should be advised that their State Pension will be, at best, derisory.  Indeed, it would be prudent to plan around not receiving anything at all.”

Furthermore the report argues that the system of National Insurance Contributions is not transparent, is not progressive and burdens companies with its complexity.

In response to the looming funding crisis and defective National Insurance scheme, Johnson urges the Government to undertake the following policy reforms:

  1. The National Insurance system should be scrapped.
  2. Employee NICs and Income Tax on earnings should be replaced with a single Earnings Tax, ideally set at 32%, 42% and 47%, based upon today’s Personal Allowance and three marginal Income Tax bands.
  3. HMRC should model the net effect of no longer collecting employer NICs receipts, offset by higher Corporation Tax, dividend tax, Earnings Tax and VAT receipts.  Any projected shortfall should be made up by additional consumer taxes.
  4. The Chancellor should use the Autumn Statement to signal his intention to end NICs and introduce an Earnings Tax.

Media Impact:

“[T]he Treasury will be forced to raid income tax receipts to ensure old-age payouts continue, according to the influential Centre for Policy Studies.”

Daily Telegraph Front Page: Millions face tax rises or 'derisory' state pension, report claims

“The findings cement a hunch that experts in the field have had for years: that the state pension’s funding position is in serious trouble.”

Daily Telegraph: Time for the truth: Young people, don't expect a state pension

Michael Johnson - Monday 13th October 2014

Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.