Britain’s state pension system will “pass breaking point” and become unaffordable by 2030, a leading think tank has warned – but an expert has explained there could be a replacement.
The pension system faces severe cashflow problems, with costs set to outstrip National Insurance contributions as the ratio of workers to pensioners shrinks.
The stark warning comes as analysis shows that without immigrants plugging gaps in the country’s labour market, the state pension would be “pushed past breaking point”, the Adam Smith Institute has warned.
Their research indicates the system will become unaffordable by 2035, but cutting immigration would accelerate this crisis point to 2030.
The state pension currently costs the Exchequer £125billion annually, supporting payments to nearly 13 million retirees. This figure is expected to surge to £150billion in real terms within the next decade, according to forecasts.
The scale of pension spending has grown dramatically, rising from two per cent of GDP in the early 1950s to more than seven per cent today.
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Around £1 in every £8 of Government spending now goes towards the state pension
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Around £1 in every £8 of Government spending now goes towards the state pension, a proportion that is set to increase to £1 in every £6 within 50 years.
The Office for Budget Responsibility projects pension spending will be £23billion higher in 2027-28 than it was at the start of the 2020s.
Sir Steve Webb, former pensions minister has warned the state pension triple lock will not exist in a generation’s time, amid growing concerns about the system’s sustainability.
Webb, now a partner at pension consultants LCP, says the fiscal strain on workers will become “very severe” due to an ageing population and falling birth rates.
He suggested the policy could be replaced with a system whereby pensioners were paid a fraction of average wages.
Webb told The Telegraph: “[The triple lock] won’t last forever, because logically it would go up higher than prices and earnings in the long term. There might come a point when even pensioners want money spent on other things. It won’t be here in a generation.
“You’d have to set a target – [move off the triple lock] when the state pension hits, for example, a third of average wages. The politics are very difficult – no one wants to be the one who switches it off.”
Sir Keir Starmer’s spokesman insisted that the Prime Minister was “committed” to the triple lock but could not guarantee that it would exist in its present form for the whole of the current parliament.
Immigration currently brings an additional £3.3billion into Treasury coffers annually, according to research by the Centre for Economics and Business Research (CEBR). Nina Skero, chief executive of CEBR, says immigration is “undoubtedly” supporting the state pension system.
The average immigrant is more likely to be of working age than British-born residents, contributing more through National Insurance, income tax and council tax while using fewer public services.
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She said: “The assumption used to be that you would be able to pay for higher state pensions from the higher productivity of people who were still working. This hasn’t materialised. Instead, we have a dwindling number of people working at the same productivity levels.”
Net migration to Britain has risen dramatically, from 184,000 in 2019 to 906,000 in the year to June 2023. Of the 1.1 million non-visitor visas issued in the year to September 2024, 242,000 were for work applicants.
If immigration were reduced, the pool of workers would diminish and wages would be driven up, according to Skero. However, this would lead to business failures and force the Government to seek additional tax revenue even though tax rates are already approaching their “peak effectiveness”.
Webb added: “Without inward migration, the working-age population is set to shrink rapidly relative to the retired population which will mean either big tax rises on workers or a squeeze on pensions and services for pensioners, while immigrants help ease the demographic crisis, those who stay will eventually build up their own pension rights.”
Analysis by the Centre for Policy Studies found that around 72 per cent of skilled worker visas in 2022-23 were likely going to people earning below the average UK salary.
The new full state pension currently stands at £221.20 per week, set to increase to £230.25 in April under the triple lock policy. The triple lock ensures pension rises by the highest of inflation, wage growth or 2.5 per cent, pushing payments to around 30 per cent of average earnings.
The Adam Smith Institute’s Maxwell Marlowe warns this pay-as-you-go funding model has transformed the state pension into a “Ponzi scheme” which is “bursting at the seams”.
He said: “The state pension system is within touching distance of fiscal insolvency, there are serious cashflow problems into the National Insurance fund.
“The solution has been to import labour to prop up tax revenue. This is a help in the short-term, but it adds people to the state pension in 30 or 40 years’ time.”