Letter: NI contribution base 'substantially eroded'

Sir: In his article of 18 May, and comments the previous day in his Business column, Hamish McRae points to the increasing burden on the public finances of pension payments to the growing number of elderly people in all OECD countries.

It would be natural to infer that the substantial deficit on the UK National Insurance Fund, which led to Norman Lamont's proposal for a rise in NI rates next year, is in some way connected to the growing burden of state pension benefit payments. However, the connection is by no means as direct as this.

Because the basic pension is indexed to prices, its value relative to earnings is falling steadily. Furthermore, projected benefits from the additional earnings-related tier (SERPS) were cut back in the mid-1980s. Consequently there is no real financing burden for the UK's state pension in the future.

The current deficit on the National Insurance Fund stems not just from the steady growth in the numbers of the unemployed and the long-term sick, but also from the substantial rebates given to individuals who have opted out of the state pension scheme in recent years in order to buy personal pensions. This 'privatisation' of pension provision is seen as an additional way of keeping future public pension expenditure under control.

In effect, however, the National Insurance contribution base has been eroded substantially, which is why a higher NI rate is needed to finance existing claims on the fund. Getting the balance between the short-run public finances and future pension expenditures on the elderly is a difficult one; it may be that in the UK we have worried too much about the future burden at the expense of current taxpayers.

Yours faithfully,

RICHARD DISNEY

Professor of Economics

University of Kent

Canterbury