Social Security Reform in Advanced Countries: Evaluating Pension Finance

By Toshihiro Ihori; Toshiaki Tachibanaki | Go to book overview

8

Pension reform in the UK

From contribution to participation

Ashwin Kumar1


8.1Introduction

In 1997, the state pension problem facing the new UK government was not one of funding but of adequacy.

A series of reforms by the administration of 1979-97 had seen a fall in projected spending on state pensions as a proportion of GDP. Rather than the 'demographic timebomb' of popular perception leading to a funding crisis, the UK was one of few developed countries to face no serious future funding problems in its state pensions. In fact, as a proportion of GDP, state spending on transfers to the elderly was projected to fall by one-third over the next 50 years.

This reduction in future spending arose out of reforms in the 1980s that reduced the future value of both the flat-rate basic state pension and the State Earnings-Related Pension (SERPS). The reforms had also widened the options for individuals making their own private provision.

But those at the bottom of the earnings distribution were least able to deal with the effects of these reforms. First, the basic state pension would no longer guarantee a minimum level of income around the level of Income Support, the main means-tested form of support.

Second, the earnings-related pension, SERPS, which was being reduced in value, by its design already provided least support to lower earners. Third, lower earners were least able to take out the new private pensions (known as personal pensions) because their charging structures tended to be designed for those with more to invest.

Short- and medium-term estimates did foresee the same or a smaller proportion of pensioners reliant on Income Support, probably as a result of cohort effects increasing the average amounts of occupational pension that future pensioners could expect to receive. But the longer-term estimates suggested that the proportion on Income Support would then start to rise as some of the 1980s reforms matured.

One potential effect of a greater proportion of the pensioner population relying in the future on means-tested support might be to discourage voluntary saving on the part of low and moderate earners. Those who

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