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Future pensions will require tax increases

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Tax hikes will be needed to sustain the expected levels of future pension payments and benefits, a leading think-tank has said.

According to a report from the National Institute of Economic and Social Research (NIESR), people aged over 65 will get £220,000 more from the state than they would have contributed over the course of their lives.

However, a new born child now will probably pay a net £159,000 more in taxes and contributions than they will receive in return from the state in benefits and services.

The effect will be to create a multi-trillion pound commitment that must be met by future generations.

But closing that tax and pensions gap could cost as much as between £80 billion and £90 billion a year in additional taxes, the NIESR warned.

The estimated shortfall in public funds is primarily driven by pressures on health and pension spending, the NIESR said, rather than by rises in government debt.

So tax increases amounting to 6 per cent GDP may be needed in the future if the country is to avoid a serious diminution in services. That is the equivalent of 16 per cent of total current tax receipts.

The report said: “There is a past history of pay-as-you-go benefits which has allowed earlier generations to receive more from the state than they have contributed over their lifetimes, and it is inevitable that there is now a net contribution which has to be paid.”