Fiscal effects of reforming the UK state pension system

The fiscal and distributive impacts of three reforms to the social security pension system in the UK are evaluated. All three reforms are designed to increase the retirement age by changing the incentive structure underlying the pension system. The first increases the state pension age by three years. The second introduces an actuarial adjustment to retirement both before and after age sixty five allowing deferral to age 70. The final reform adapts the second reform to include a cap and a floor so as to mirror more closely the existing state pension scheme in the UK. Using a transition model of retirement, the simulations show that increasing the state pension age leads to a lower level of expenditure on the state pension, which is only partially offset through increased state spending on both means-tested income support and disability benefit (invalidity benefit). Employee national insurance receipts are also directly increased through the increase in the state pension age. The increase in retirement ages would also lead to an increase in government revenues arising from increased income tax and employee and employer national insurance contributions. As a result there would be lower levels of government borrowing (or larger government surpluses) than under the base system.

Pension Provision and Retirement Saving: Lessons from the United Kingdom

We describe the trajectory of pension reform in the United Kingdom, which has focussed on keeping the cost of public pension programmes down during a period of steady population ageing whilst attempting to maintain an adequate minimum level of income security for low income households in retirement. Instruments for achieving these aims have been to target public benefits on low income households, permitting individuals to opt out of the second tier of the public programme into private retirement accounts, and the use of tax incentives to encourage additional private retirement saving. Frequent reforms to the pension programme raise the question of whether households can make reasonable private retirement saving provision in the light of growing complexity and potential shortcomings in individual decision-making. This paper sheds some light on these issues.pensions, social security, retirement saving

The value of teachers' pensions

As private sector employers have moved away from providing final salary defined benefit (DB) pensions to their employees, attention has increasingly focused on the public sector's continued provision of such pensions and the value of these pension promises to public sector employees. The estimated underlying liabilities of such plans have increased sharply in recent years, at least in part due to unanticipated increases in longevity. This has led to reforms of all the major public sector pension schemes, the net result of which has been to reduce the level of benefits offered by the schemes (predominantly to new, rather than existing members). This paper examines, in the context of the Teachers' Pension Scheme (TPS), how much the pension promises are worth and what effect the change in scheme rules has had on them. This paper also addresses a number of other issues that are important when valuing DB pension rights and their relation to overall remuneration. First, how increases in current pay feed through into pension values. Second, how the age profile of earnings affects the profile of pension accrual. Finally, how the value of pension rights in DB schemes compares to that in a stylised defined contribution (DC) scheme. The figures presented in this paper relate specifically to the composition of members and the specific scheme rules of the TPS. However, the issues raised apply equally to other DB schemes, both public and private sector.

Ill health and retirement in Britain: a panel data based analysis

We examine the role of ill-health in retirement decisions in Britain, using the first eight waves of the British Household Panel Survey (1991-98). As self-reported health status is likely to be endogenous to the retirement decision, we instrument self-reported health by a constructed Ѩealth stock' measure using a set of health indicator variables and personal characteristics, as suggested by Bound et al (1999). Using both linear and non-linear fixed effects estimators, we show that adverse individual health shocks are an important predictor of individual retirement behaviour. We compare the impact of our constructed health measure on economic activity with that arising from the use of other health variables in the data set. We also examine the impact of the 1995 reform of disability benefits on the retirement decision.

Tax reform and retirement saving incentives: evidence from the introduction of stakeholder pensions in the UK

Faced with ageing populations, OECD governments are seeking policies to increase individual retirement saving. In April 2001, the UK government introduced Stakeholder Pensions - a low cost retirement saving vehicle. The reform also changed the structure of tax-relieved contribution ceilings, increasing their generosity for lower earning individuals. We examine the impact of these changes on private pension coverage and on contributions to personal pension accounts using individual level micro data.

The importance of incentives in influencing private retirement saving: known knowns and known unknowns

We summarise what economic theory predicts about how retirement savings decisions are affected by marginal withdrawal rates created by the tax, tax credit and benefit system, and by the information individuals are provided with. All these predictions vary across individuals with their circumstances. In documenting the incentives to save in a private pension provided by the tax, tax credit and benefit system we show that some individuals face a very strong incentive to place funds in a private pension at particular times during their working lives. Those who are basic rate taxpayers who expect to become higher rate taxpayers or move onto the taper of the Working Tax Credit have an incentive to delay making any private pension contributions until that time, while those expecting to move off that taper have an incentive to bring forward future pension contributions. When examining retirement saving it is important to consider both saving decisions and also the choice of retirement age. We cite previous evidence that both of these margins have been adjusted by individuals in the light of changed financial incentives. In particular there is evidence that spending by working age individuals was increased in the light of the introduction of the State Earnings-Related Pension Scheme. In addition evidence from West Germany and the United States shows that individuals' retirement ages can be affected substantially by changing financial incentives. There is less evidence of reduced spending by working age individuals in the light of the decision to index the Basic State Pension in line with prices rather than the greater of prices or earnings. New evidence from the English Longitudinal Study of Ageing shows that it is low and high wealth individuals who are most likely to be out of the labour market prior to the State Pension Age, though often for very different stated reasons. This suggests that if retirement incomes of those with low wealth are to be increased then increased labour market participation is perhaps a margin for them to adjust. Incentives to work and save are potentially affected by two recent UK reforms: the introduction of the two new tax credits (Working Tax Credit and Child Tax Credit) and the introduction of the Pension Credit. We present some preliminary evidence on whether the strong incentive to contribute to a private pension provided by the two new tax credits has boosted private pension participation, the results of which are somewhat inconclusive and are worthy of further research. Examining the distribution of current pensioner incomes with respect to the incentives induced by the Pension Credit reform we find that many single pensioners will see an unambiguous increase in the incentive to increase their private retirement income - for example through increased saving or later retirement. There are still large numbers of single pensioners who see a reduction in the incentive to increase their retirement income, the majority of whom have private income which they might decide to reduce. Fewer individuals in pensioner couples are eligible for the Pension Credit. Despite this we find that a similar proportion faces a reduced incentive to acquire greater income as we did for single pensioners. If the expectations of individuals do not reflect the current rules of the system, then we cannot expect to observe responses fully in line with economic theory that is predicated on full information. Recent evidence from the English Longitudinal Study of Ageing suggests that on average individuals underestimate their longevity and overestimate the private pension income that they can expect to receive. On the other hand, expectations of being in paid employment at older ages are, on average, similar to the current proportions of older individuals who are in paid work and individuals' expectations of remaining in the labour market at older ages appear to square up with the marginal financial incentives to remain in work that are created by different types of pension scheme.

Pension Provision and Retirement Saving: Lessons from the United Kingdom

We describe the trajectory of pension reform in the United Kingdom, which has focussed on keeping the cost of public pension programmes down during a period of steady population ageing whilst attempting to maintain an adequate minimum level of income security for low income households in retirement. Instruments for achieving these aims have been to target public benefits on low income households, permitting individuals to opt out of the second tier of the public programme into private retirement accounts, and the use of tax incentives to encourage additional private retirement saving. Frequent reforms to the pension programme raise the question of whether households can make reasonable private retirement saving provision in the light of growing complexity and potential shortcomings in individual decision-making. This paper sheds some light on these issues.

What is a public sector pension worth?

We measure accruals in defined benefit (DB) pension plans for public and private sector workers in Britain, using typical differences in scheme rules and sector-specific lifetime age-earnings profiles by sex and educational group. We show not just that coverage by DB pension plans is greater in the public sector, but that median pension accruals as a % of salary are almost 5% higher among DB-covered public sector workers than covered private sector workers. This is largely driven by earlier normal pension (retirement) ages. For workers of different ages in the two sectors, marginal accruals also vary as a result of differences in earnings profiles across the sectors. The differences in earnings profiles across sectors should induce caution in using calculated coefficients on wages from cross sections of data in order to estimate sectoral wage effects.