This blog moves from a tax- moan about someone who could no better, to a defence of how we pay elder people from taxation. Thanks to regular commentator “Dearieme” and Derek Scott and thanks to Ben Wilkinson who got this conversatopn going!
I wrote an article that criticised the Times for being irresponsible about pensions. You can read it here.
Ben Wilkinson, the Times’ Head of Money complains that even with £1m in his pot, he won’t be getting a proper wage in retirement. I complained that he had a cheek complaining that he would have to pay tax in retirement – especially as he wouldn’t have to pay national insurance (which pays for much of what we get in retirement by way of income and benefits.
I was reproved for over-egging the value of national insurance to the NHS by my good friend Derek Scott.
Derek Scott says:“… the NHS (where most of NI goes).”
No, most of the National Insurance fund and collections do not go to the NHS.
The vast majority of money raised from National Insurance contributions (NICs) goes into the National Insurance Fund to pay for social security benefits, with the State Pension being the largest single item.
commonslibrary.parliament.uk/research-briefings/sn04517/
It also funds benefits like the new-style Jobseeker’s Allowance, Employment and Support Allowance, and Maternity Allowance.
A portion of National Insurance receipts is allocated to the NHS before the rest enters the fund, but this only covers a minority of the total health budget with the rest funded through general taxation.
Well I was told off there but that was not the end of the conversation as “dearieme” wasn’t having such talk from Derek and me and gave it back to us…
dearieme says:
Money is fungible. We didn’t hypothecate taxes in Britain. So what you say is arbitrary. You could equally well say that NI funds defence, schools, university students, … It’s all just money. The “National Insurance Fund” isn’t a fund, it’s an accounting convention or, if you prefer, it’s a fraud.
Contributions are credited to it and certain contributory benefits are charged to it. The NIF has its own accounts, and its balance is an identifiable liability/resource within the government’s public finances.
There is also a financial consequence to the NIF having a surplus or deficit: it can hold investments in government securities, and the NIF receives interest on those investments.
If the NIF were merely a fictional memorandum account with no financial consequences whatsoever, interest credited to it would indeed be largely cosmetic.
But if the NIF holds government securities and receives interest, then its balance has some financial reality.
I agree, however, that the precise mechanics are still circular from the perspective of the consolidated public sector: one part of government owes another part, but that doesn’t make the NIF fraudulent.
A maintained buffer reserve equivalent to at least two months’ expenditure isn’t, however, evidence that NI contributions are literally sitting in a bank account waiting to pay pensions.
I have used this, for example, to point out that WASPI compensation, estimated at up to £10 billion, was well within the NIF’s excess over budget, and got nowhere.
The Government Actuary is required by legislation to review the long term position of the NIF at least every five years. His/her report includes a projection of future National Insurance contribution receipts and benefit expenditure from the NIF, over the period 2020-21 to 2085-86, to highlight the factors likely to affect the future development of the NIF.
GAD recommends that the NIF maintain a minimum working balance of at least 16.7% of projected annual benefit expenditure, which equates mathematically to exactly two months (or one-sixth) of annual spending.
The position of the NIF relative to this target at the moment shows a significant safety margin. For the 2025 fiscal period, the 16.7% minimum working balance requirement was estimated at £24.2 billion. The NIF closed with an actual balance of £79.3 billion.
This means the actual fund balance is more than three times larger than the required HM Treasury minimum target.
It demonstrates that the NIF isn’t simply an entirely fictional number invented after the event. There is a deliberate HM Treasury liquidity/financing policy associated with the NIF.
That makes “accounting convention” a much better description than “fraud”.
NI creates a political narrative of earned entitlement that is not equivalent to individual funded saving.
I did not say “I paid National Insurance for 40 years (46 years, actually), therefore I have earned a State Pension.”
Because I agree that it does not mean my 46 years of contributions have accumulated into an investment pot sufficient to finance my state pension.
The state pension is fundamentally a pay-as-you-go social insurance system. Today’s receipts and other government resources finance today’s expenditure, with the NIF providing the statutory framework around contributory benefits.
And that is precisely why you saying “NI funds defence, schools, universities…” isn’t entirely frivolous. At the consolidated government level, all taxation and government borrowing interact to finance the government’s expenditure.
But “you could equally well say NI funds defence” needs qualification.
There’s an important asymmetry.
I could say that ultimately NI receipts contribute to the government’s overall fiscal capacity, and therefore indirectly support everything government does.
But you cannot conclude from that that NI has no earmarking whatsoever.
Parliament has established a statutory relationship between NI contributions, the NIF and contributory benefits.
Cash-flow level: fungible, we agree.
Consolidated public-sector level: fungible, we agree.
Legal/accounting level: not fungible in quite the same sense, so we disagree.
An individual’s “personal pension pot” level: absolutely not a funded pot, we agree.
I’d rewrite your argument rather than accept its final sentence.
“Money is fungible, so it is misleading to describe NI contributions as though they are placed in individual pension pots or physically segregated to pay particular benefits”.
But I didn’t say that.
At the level of the consolidated public finances, NI receipts are part of the government’s overall financial resources. We agree.
But the NIF is nevertheless a real statutory accounting and financing mechanism, with defined receipts, expenditures, assets and interest.
Calling the national insurance fund an ‘accounting convention’ is defensible. I used to be a bean counter in a former life. But calling it a ‘fraud’ confuses fungibility with non-existence.
And there’s an especially interesting implication for the “I paid my NI, therefore the state owes me a pension” argument: the entitlement comes from the statutory social insurance rules, not from ownership of money accumulated in the NIF.
That to me is a much stronger critique of your comment than calling the NIF a fraud.
Well said Derek! It would be great if teenagers were taught about pension funding both state and private before leaving school, Your NIF description would be a good introduction. Too many think their “pot” is their “pension”, when in reality it is the start of some extremely difficult decisions as they approach “retirement”.
Could this explain why when Jeremy Hunt cut the National Insurance contributions in the Spring 2024 (Election) Budget, Labour had to reinstate them, but with employer contributions, in the following Budget?