Public Pension Reform in the United Kingdom: What Effect on the Financial Well-Being of Current and Future Pensioners?*

Abstract

Unlike many tax and benefit changes, reforms to public pension programmes take many years to have their full effect. This paper examines the effect of reforms to the public pension programme in the United Kingdom on the state retirement incomes of current generations of pensioners and on the prospective state incomes of future generations of pensioners. We show that, for an individual with lifetime earnings close to male average earnings, the UK pension system is at its most generous to those reaching the state pension age around the year 2000, but that the introduction of the state second pension and the pension credit postpones this peak for individuals on lower incomes and for those with substantial periods out of paid employment spent with caring responsibilities. We also consider how the ‘mix’ of benefits, particularly between the contributory and income‐tested sectors, could change over time, and the impact that this would have on incentives to save for retirement.

The economic circumstances of cohorts born between the 1940s and the 1970s

“…On the other hand, cohorts retiring after 1998-99 were affected by subsequent reductions to the generosity of the rules governing SERPS accrual. 33 The peak of the state pensions 32 For more on this, see Disney and Emmerson (2005). 33 The accrual rate was originally set at 25% of earnings between the lower earnings limit (LEL) and the upper earnings limit.…”

The Future of Pensions: Reforms and their Consequences – Introduction

“…Hence one measure of redistribution is intergenerationalcomparing, over the life cycle, the receipt of benefits relative to taxes and contributions paid (perhaps formally computed as an average 'internal rate of return') of successive date-of-birth cohorts. Almost all evidence for most countries, including the UK, is that such returns were highest for those brought into the public pension programmes in their inception stages (typically in the 1950s) and again among the early 'baby-boomers' (Disney, 2004;Disney and Emmerson, 2005) compared to the current working generations, given demographic ageing and other cutbacks. In private pension plans, this decline in returns to later cohorts may be replicated given low annuity rates, falling support ratios of contributors to pensioners and the sluggishness of capital markets.…”

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

“…In addition the means-tested benefit for pensioners, known as the Minimum Income Guarantee (MIG), was formally indexed to earnings rather than prices from April 1999 (unlike the rest of the pension programme), so increasing its real value for low earners and reinforcing the disincentive to save for retirement. Analysis of these, and subsequent, trends suggests that, at least under the current regime, whereas replacement rates cohort-by-cohort for the public pension programme have already peaked for average earners, low earners are likely to see increasingly generous replacement rates from the public programme for several decades yet (Disney and Emmerson, 2005). To the extent that single women, or couples that include a zero earner or have low education (to take some of the groups where we have found a significant effect) are disproportionately likely to gain from these reforms to the public pension programme relative to the control group, we might expect to understate take-up as a result of the change in contribution limits.…”