Future generations could be short-changed and the public finances put in jeopardy unless the UK takes serious measures to reform the state pension system, according to a report released today by the Institute of Economic Affairs (IEA)
One way to give pensioners and taxpayers a better to deal would be to revive savers' ability to contract out of some the state pension in return for a rebate on National Insurance (NI) contributions, the IEA argues.
The IEA research suggests that a move back toward contracting out, which was used by 14m people in the 1990s, would give individuals greater freedom to invest and move Britain's pension system away from its current pay-as-you-go model.
"Under Gordon Brown and then under this government, our widely-admired system of private pension provision has been eroded and replaced by state provision", said Philip Booth, the IEA's editorial and programme director.
The IEA's reforms would see participants receive rebates of NI contributions equal to the value of that half of the state pension they will give up. The measures could result in future retirees receiving £3,000 a year, to invest in their own pension pots.
According to the IEA, this would be especially beneficial for the least well-off:
People on low incomes and those with carer responsibilities would find themselves able to build a substantial pension pot without relying on the state pension under the proposals.
Warnings have abounded from economists and think tankers for years about the risks of an almost wholly state-provided pensions system in the face of a rapidly aging population.
In order to meet the UK's future pension commitments and be debt free by 2060, the country faces substantial tax hikes or cuts to public spending by as much as 25 per cent.
The government has taken steps to cut back on future pension liabilities by raising the retirement age, but this is unlikely to be adequate to address the demographic challenges facing the Treasury.
Furthermore, politicians will want to keep in mind the growing anger at the perceived unfairness of maintaining or expanding welfare and perks for the retired
The IEA's research is particularly timely since the Coalition government is preparing to abolish contracting out from the state system altogether.