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The Claim National Insurance Pays For State Pensions Is False

A recent article in the fact-checking service The Ferret has stirred debate around an independent Scotland's ability to use National Insurance payments to fund pensions in an independent Scotland.

Modern Money Scotland has fact-checked The Ferret's specific description of National Insurance payments and found that their analysis is incorrect. To further analyse this claim, Modern Money Scotland also examined National Insurance payments described by the Chief Executive of These Islands, Sam Taylor.

1) Do Taxpayers Fund Pensions in the UK?

In their fact-checking article, The Ferret makes the following claim:

"State pensions in the UK are paid by contributions from people who are currently working, so effectively people who are in-work are paying for the state pensions of those who have retired."

This is incorrect. We explore this in-depth in our FAQs section of our website, where we break down how the UK monetary system works. In short, all UK government spending does not draw on specific funds. It is instead newly created public money from the Bank of England. Taxpayers do not fund state pensions or any other public services in the UK.

The Ferret further states:

"It is not possible to know for certain how an independent Scotland would pay for a state pension".

From a operational standpoint this claim is also false. The Scottish National Party's policy for setting up a new state is to deliver a new central bank and currency between 1-5 years after independence. A new Scottish central bank and currency would take operational effect once a newly independent Scottish parliament has voted to do so. An independent Scotland's own central bank would create new spending with public money to cover pensions in an independent Scotland. Therefore, it is possible to know "how" an independent Scotland would pay for the state pension.

2) Does HMRC Accept Banking Liabilities?

Many anti-independence activists continue to insist that National Insurance is used to "pay for" public services. The main advocate for this is Sam Taylor, Chief Executive of These Islands.

On social media, Sam Taylor cites a Freedom of Information (FOI) request in regards to the tax collection process in the UK. The specific paragraph cited states:

"The majority of tax revenue collected is passed directly to the Bank of England then onto HM Treasury. HMRC do however move some money directly to fund the NHS and to the Department of Education to fund Student loans."

Sam Taylor then goes on to claim on social media that because National Insurance is used to fund the NHS, this also means:

"The state accepts bank liabilities for the payment of taxes because the people it needs to pay will happily accept a bank deposit."

Modern Money Scotland further analysed this claim and found that Taylor's analysis is incorrect.

As described by researchers at the UCL Institute for Innovation and Public Purpose and the Gower Initiative of Modern Money Studies, at the end of each day all government receipts enter Exchequer accounts at the Bank of England. This is the same for both tax and National Insurance payments. When entering these accounts they are not commercial bank money or any other type of asset. Instead all receipts are public money - Bank of England money. Once tax enters these Exchequer accounts, it is then legally mandated to enter the Consolidated Fund.

Whilst we think think we are paying tax from our bank deposits, what is actually happening is that we are appointing our commercial bank as an agent to deliver state money.

The difference between tax and National Insurance payments is that National Insurance is not legally mandated to be surrendered to the Consolidated Fund. Instead, it is transferred to the Debt Management Account at the Bank of England. However, all spending related to National Insurance provisions from the Debt Management Account is through the Consolidated Fund. Again, this is public money from the Bank of England and not commercial bank deposits. This is set internal government policy.

(Public sector accounting of the expenditure process in the UK)

(Public sector accounting of the taxation process in the UK)

The ramifications of borrowing from a commercial bank were considered by Dr Peter Cooper. In his analysis he finds that by borrowing commercial bank money to pay for government tax liabilities, all that has occurred is that the individual has shifted their liability to the private bank and away from the government. In real terms, the liability has not fully been paid and your private assets are endangered.

Further, individuals would have to pay interest on top of the commercial bank money they have borrowed to pay for government tax liabilities. In contrast, simply paying your tax in normal methods (the bank acting as an agent and paying public money) has no interest on it, and is therefore effectively cheaper.

Verdict: The claim that National Insurance pays for Pensions is false.

Overall, The Ferret is a healthy and balanced source when fact-checking claims made by various party and non-party groups. However, its economic analysis is still heavily based on orthodox models that do not reflect modern day monetary operations.

Modern Money Scotland has reached out to The Ferret for further discussion.


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