The British retirement income system is perhaps more dependent on private programs than any in the industrialized world. The government provides a modest and uniform "Basic Pension" to career workers, and now to carers and the disabled. But as benefits are indexed to prices, not wages, the Basic Pension is projected to replace a steadily declining share of earnings. The government also has a second tier earnings-related plan. But as most workers "contract out," they will rely on employer and/or individual "personal pensions" to maintain pre-retirement living standards. Reform efforts had three objectives: 1) limit public expenditures on the elderly; 2) enlarge and strengthen private plans; and 3) assure an adequate retirement income for all. The reforms succeeded in controlling expenditures. Public programs for the elderly are projected to cost just 5 to 6 percent of GDP for the foreseeable future. Private plans, however, have neither been enlarged nor strengthened. Damaging scandals hit both employer plans and personal pensions in the 1990s, and the response to those scandals has not been especially effective. Employers of late have also been exiting defined benefit pension plans at a rapid rate. The risks, low level of contributions, and generally inadequate financial management of personal pensions also raise serious questions about their ability to maintain living standards in retirement. Initiatives to assure an adequate retirement income transformed both the government's earnings related pension program and means-tested assistance for the elderly. The government transformed its second tier pension into essentially a flat benefit program for lower wage workers that will cushion the erosion of Basic Pension allowances. In its means-tested program, the government also replaced its £-for-£ reduction in benefits with a 40 pence reduction for income above the threshold amount. This change will affect incentives to work and save in different ways for different groups. For those individuals currently receiving means-tested allowances, the less draconian reduction in benefits will improve work and saving incentives. However, expanding the phase-out range for means-tested benefits will make the great majority of elderly British households eligible for such assistance. This newly-eligible group will face a disincentive to work and save, because each additional £ of income will reduce their benefits by 40 pence. Going forward, Britain's retirement income system will increasingly rely on individual accounts and means-tested assistance. The individual accounts are not well funded and carry significant risk. The disincentive to work or save created by the expanded means-tested program across a broad range of households further clouds the system's prospects. As a result, observers generally expect an increase in public expenditures on the elderly and further reforms to the system.
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Paper provided by Center for Retirement Research in its series Issues in Brief with number
gib3.
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