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The state pension is an intergenerational betrayal hidden through creative accounting
Taxpayers are footing the bill for vast, unfunded liabilities
Without radical reform, Britain will remain stuck in a destructive fiscal cycle
We’re now less than five weeks away from Rachel Reeves’ Autumn Budget, and the only person dreading it more than taxpayers might be the Chancellor herself.
We are expecting to see, yet again, tax rises to meet the rising cost of the state. Public spending as a proportion of GDP is now at about 44%. If the size and scope of the state does not change, we will be raising taxes in perpetuity.
Current levels of public spending are simply unsustainable. Around two-thirds of total public spending is ‘day-to-day’ spending on public services, such as the NHS, schools and prisons. Around a quarter of all spending is on social security, such as universal credit and the state pension.
Demographic pressures, namely age-related health and pensions expenditure, are staggeringly expensive. There are more people retiring in proportion to the amount of people working, and so costs rise, and the burden on working people to pay for those costs increases.
In 2025 to 2026, the Government is forecast to spend £316.1 billion on the social security system. Around 55% of social security expenditure goes to pensioners. This includes the state pension, which is forecast to be £145.6bn.
But the problem is even bigger than most of us realise.
The Government has enormous liabilities. Many public sector pensions are unfunded and fall into this category, that is, money that has been legally and contractually promised, but does not currently exist. Public sector pension liabilities in the UK are the Government’s obligations to pay pensions to retired public sector workers, such as teachers, NHS staff and civil servants.
While normal pension contributions are invested, these are spent on paying this year’s pensions. Any deficit in the cash flow is paid by the Treasury.
So, they are unfunded. Current taxpayer money is used to pay for current pensions. This creates an enormous future financial commitment.
It gets worse.
The Government has effectively been keeping two sets of books on pensions. The official figures that are reported to Parliament dramatically understate the true cost, because they rely on a discretionary accounting method.
As highlighted by Neil Record, public sector pensions use a government-created method called ‘Superannuation Contributions Adjusted for Past Experience’. This uses a much higher, discretionary interest rate that is chosen by the Treasury, and is not based on the markets, but on GDP forecasts. This artificially inflates the assumed investment returns and makes pensions look cheaper than they actually are.
This approach masks the true scale of the Government’s pension promises. It is using a fictional investment rate to make unfunded pensions look affordable, when in reality they represent a vast, hidden liability on future taxpayers.
In 2020-21, for example, the NHS pension scheme’s reported cost was 30.4% of salary under the SCAPE method, but the real cost was 62.2%. Across all schemes, that’s roughly £57bn of unacknowledged pension promises in just one year.
The unfunded, pay-as-you-go system shifts the burden of today’s public sector benefits onto tomorrow’s taxpayers. It is an intergenerational betrayal hidden through accounting.
Public sector pensions rise every April according to the annual consumer price index figure from the last September.
The Government will already owe £5.8 trillion in public sector pension promises by the end of this tax year. The most costly schemes are for teachers, NHS workers, civil servants and members of the armed forces.
The consequences are straightforward: taxpayers will have to foot the bill for these liabilities. Britain is taxing its way out of chaotic levels of expenditure, and has made promises for even more increases.
The problem is that commitments made by one generation must be paid for by subsequent generations. The system is unfair, and stories of public sector inefficiency and four-day weeks certainly adds salt to the wound.
Public sector pensions are a ticking time bomb. The damage will be paid for by British taxpayers.
The Chancellor could use the next few weeks to be bold. She could rethink what the Government should do, and where it should stop. Scrapping the triple lock, slashing unnecessary state expenditure (do we really need an £8bn Department for Culture, Media and Sport?) and reforming the gold-plated public sector pension system would be a start.
Without radical reform, Britain will remain stuck in a destructive cycle. Spending more, taxing more and growing less.
Put simply, the Government cannot keep chasing its tail forever.
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