The Future of the UK State Pension: A Looming Crisis?
The UK state pension system is facing a potential crisis as a result of a young worker exodus, which could have devastating consequences for pensioners. According to a survey conducted by the Adam Smith Institute in July, 28% of 18-30-year-olds are actively planning or have seriously considered emigrating, citing concerns about being 'overtaxed, underhoused, and undervalued'.
This trend is causing economists to worry, as it threatens to disrupt the social contract that underpins the state pension system. The state pension is funded by national insurance contributions from current workers, rather than a national pension fund that people pay into over their lifetime. It currently costs around 5% of GDP annually, a figure projected to rise to 7.7% by 2070, according to the Office for Budget Responsibility (OBR).
A mass exodus of high-earning young workers would exacerbate funding issues, particularly given the falling birthrate. The birthrate in 2024 was 1.41 children per woman, down from 1.42 in 2023, according to the Office for National Statistics (ONS). Without immigration, the rate would typically need to be 2.1 to maintain a stable population.
Currently, national insurance contributions more than cover the state pension. This tax year, contributions are expected to raise around £200 billion, while the state pension costs £145 billion, leaving a surplus for other spending, including the NHS. However, by 2050, widespread emigration could turn this surplus into a deficit, according to estimates by Guiide, a retirement planning platform.
The pensions expert Tom McPhail warns that the cost of the state pension is already rising by 50% over the next 50 years, and emigration will only exacerbate this issue. Young people face a perfect storm of high taxes and living costs, making it no wonder they wish to leave. The average UK house price in August was £273,000, more than seven times the average earnings for a full-time worker (£37,600 a year).
Ambitious higher earners are also caught in stifling tax traps. The marginal tax rate on income between £100,000 and £125,140 a year is 62% in England and Wales, due to the loss of their tax-free personal allowance. This could further incentivize young, wealthy workers to seek opportunities abroad.
A 2024 report by The British Council found that nearly three-quarters of 18-30-year-olds in the UK would consider living abroad, citing a better quality of life. Nearly two-thirds said their standard of living is worse than their parents' generation.
McPhail emphasizes the need for lower state spending and a more aspirational proposition of hope from politicians. Young people need to see a path to economic growth, homeownership, and pension accumulation, which could persuade them to stay. However, the current trajectory suggests that the state pension system is heading towards a crisis, and it is unclear how it will be resolved.
