This article examines the U.K. retirement income security system from the American perspective. It addresses issues that most concern U.S. analysts: how the United Kingdom has kept its future public pension costs at a manageable level, the extent to which privatization of public pensions has contributed to low pension costs, the popular appeal of individual pension accounts, and the impact of privatization on retirement income. These issues are best understood in the context of the U.K. pension program's particular institutional structure and policies, two of which- "contracting out" of public pensions, and strong reliance on means-tested benefits-have been largely rejected in the evolution of U.S. policy to date.
Particular use is made of recently available data on coverage rates for public and private pension programs over the total working population and administrative records on inactive personal pension accounts.
The impetus for Social Security reform in the United States has been gathering momentum over the past several years, fueled primarily by the projected long-term actuarial imbalance in the system. This has led many of the baby boom generation and younger workers to ask: "Is Social Security going to be there for me when I retire in the 21 st century?" The 1994-96 Advisory Council on Social Security examined problems and prospects of the system and presented three options for reform. In addition, members of Congress and nongovernment groups have also presented reform proposals of their own. A common feature among many of these proposals is a call for establishing individual pension accounts, either to partially replace the existing Social Security program or to add onto the current system. Two of the three contending options presented by the Advisory Council on Social Security, for example, recommended the introduction of individual accounts, though they differed in the specifics of how these accounts should be funded and managed (Advisory Council on Social Security 1997, Vol. 1, pp. 28-33, 102-134, and 158-159). At this writing, there are a total of 11 Social Security reform bills pending in both Houses of the U.S. Congress, and all of them feature individual accounts.1
A number of countries around the world have, in recent years, transferred their government public pension programs in whole or in part to private arrangements such as individual accounts.2 However, only two-Chile and the United Kingdom-have accumulated 10 or more years' experience with these accounts as a direct alternative to government programs. While neither of them has had a long enough history with individual pension accounts to measure the eventual impact on retirement benefits,3 various aspects of these countries' privatization efforts may be instructive for the United States.
The near-total privatization in Chile since 1981 has received extensive and intensive study in this country and abroad as a model for reform.4 However, few studies in the United States have referred to the U.K. experience, even though it seems to be of greater relevance to the United States.5 Not only do the British and Americans share a common cultural heritage, but the U.K. experience is more relevant to that of a large developed economy, and it also involves partial privatization of the public system, similar to most proposals made for the United States.
Several aspects of the U.K. experience are worthy of examination. First, because the United Kingdom has been lauded for having put its fiscal house in order, it is instructive to review the reported successes in financing the U.K. public pension system. The National Insurance Fund (NIF), which finances the retirement pension program (together with other income security programs, such as survivors, disability, sickness and maternity benefits, unemployment, and work injury), does not appear to have either short-term or long-term solvency problems. In addition, some comparative studies have demonstrated that the U. …