One of the most cruel and callous lies of the pension system in the UK is that it involves people paying all their lives "into a system" that they get "paid back" from.
This myth has been created and perpetuated by politicians, and is sustained by the lie that is "national insurance". It isn't insurance. Any private company that offered a voluntary scheme that resembled "national insurance" would face legal proceedings and its directors would be convicted of fraud. I have heard it once described as a PONZI scheme, which is what is resembles.
The problem lies in several dimensions.
Taxpayer funded old age pensions originally were established to address the poverty of the elderly, back in the days when life expectancy was in its mid 60s. The issue simply being that when people were too old or frail to work (during an age when most work was physical) there was a lot of support for providing for the elderly poor. This translated eventually into a basic universal pension to avoid poverty, but not much else.
What came beyond that was the idea that people could have more, and that it could be contributory. "You get what you pay in" sounds like a fundamentally fair principle. So came "national insurance", essentially a tax that would be a contribution through your life that would reflect in a higher pension once you retire.
Except that it was an unintended fraud.
Unlike individual pension schemes, where there are accounts kept, where the money is invested for a return that will be reflected in the final pension amount, national insurance contributions were treated as taxes.
The state spent the lot. It saved nothing and invested nothing.
The intention was that, in the long run, national insurance would "self-fund" as the money coming in from working people would be enough to pay the pensions of the retired. This isn't contributory, but an inter-generational transfer. Existing taxpayers pay for the next generation, which creates several problems and an overall unfairness and unsustainability that needs to be tackled.
The obvious problem is that life expectancy is soaring, and birth rates are in decline on average. The numbers who are working relative to the retired are in free fall because people are living longer, and having smaller families. Short of rather distasteful neo-fascist calls for people to breed more, it simply doesn't add up and it is grossly unfair to claim that it should be made to. The ultimate result of this situation is that those in work need to be taxed more highly to pay pensions of the currently retired than the retired had to pay when they were in work.
The secondary problem is that the system does not generate savings and consequent income and wealth that can be inherited and contribute to the overall net savings in the economy.
Because it is dependent entirely on current taxpayers being willing to pay for the benefits of past taxpayers (or non-taxpayers, as there isn't a huge variability in the state pension based on taxpayer contribution), it doesn't mean that those who have paid taxes in the expectation of a future pension have any rights to anything at all.
There is no personal account. If you die before pension age, there is no asset that can be passed onto your spouse or your children or estate more generally. This effectively means that those who die before they retire could be said to be "ripped off", as they can't partake from the unconsented "deal". Similarly those who spend most of their lives on benefits, paying no net income tax, receive a pension nevertheless. You don't need to "pay into" the fictional system to get money out of it.
As there are no savings, then the money paid does not go into investments per se, whether they be bank deposits or shares or equities. The money paid in national insurance does not contribute to wealth generation, it literally is a transfer to existing pensioners. It is spent on consumption by them. Given the UK has a low net savings rate, there are major benefits that can arise from establish pension funds that can own shares in various businesses, bonds, equities, property and the like. They can provide capital for investment and business growth. This forms a personal asset base that ultimately can be used to provide an income in retirement, and an asset to pass onto the next generation, supporting education, housing and business development further. At the moment, it simply transfers taxes from one generation to the next.
The system as it stands maintains a myth of contribution and getting "payback" from a system that involves none of that. Who reasonably can claim they "paid for" a winter fuel allowance that didn't exist 20 years ago?
The current system is fiscally bankrupt, but also morally bankrupt. It has taken the taxes from tens of millions of people, in the form of "national insurance contributions" on the promise of providing an adequate retirement income, but it took the money and spent it on existing pensioners, on the NHS, on welfare for others, on defence etc. It didn't even replicate what New Zealand now does, which is to take a proportion of income tax and invest it into a national sovereign wealth fund, the income from which is to support paying pensions.
Moreover, it has generated a massive informal lobby group of current pensioners, ever rotating and growing in size, who all demand their share of a system that they think they paid into. The Blair Government bribed them with free bus passes, TV licences and winter fuel allowance, making them all universal because it sustained the "contributory" fraud. The current government bribes them with rises that are the highest of three indices, in other words pensioners now are getting better pay rises than the people actually paying for their pensions.
How can this last?
The current system is unsustainable and unfair. It needs to be shifted towards a contributory system for all, so people have personal retirement accounts they draw upon in their old age. Yes a few wont contribute enough, so they effectively receive the "welfare" component, but most will save more than enough, the few who die before retirement will have provided for their spouse and family as the pension becomes a life insurance policy.
Such a system works in several countries, notably Chile and to a lesser extent Australia. It is the ultimate in democratic savings and welfare, because it personalises the contributions, develops enormous pension funds (with a range of choices available) and it personalises the benefits. Everyone knows they literally get what they pay for. Finally it raises the national savings rate enormously.
There are painless ways to make that transition, it is time some politicians had the courage to admit that this is a problem and that it needs to be reformed.