Transcript Pensions and Savings in the UK

Pensions and Savings in the UK
Matthew Wakefield
The Institute for Fiscal Studies
January 2004
Outline
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Why an economic policy issue?
Responding to the ageing population
Pressures on UK pensions system
Conceptual framework
What this suggests about UK policies
Reform as natural experiment: what
economists can learn and contribute
• Conclusions
Why an economic policy issue?
Allocation of scarce resources
• Between consumers in population
• Across an individual’s lifetime
Reasons for policy intervention?
• Equity
• Efficiency/market failures
• Paternalism
Why ‘hot’ policy issue now?
Ageing population
• Financial pressure on (state) provision
• Ensure elderly get adequate resources
Ageing Population
Elderly Dependency Ratios
Country
France
Germany
Italy
Japan
UK
US
Source: OECD.
1990
21.3
21.7
22.3
17.2
24.1
18.9
2000
24.5
24.1
26.7
25.2
24.1
18.6
2020
32.7
34.4
36.8
46.9
31.1
25.0
2050
46.7
54.7
68.1
71.3
47.3
34.9
Projected spending
Projected pension spending (% of GDP)
Country
France
Germany
Italy
Japan
UK
US
2000
9.8
11.5
12.6
7.5
4.5
4.2
Source: Disney & Johnson (2001).
2010
9.7
11.8
13.2
9.6
5.2
4.5
2020
11.6
12.3
15.3
12.4
5.1
5.2
2030
13.5
16.5
20.3
13.4
5.5
6.6
Pressures: Responses
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Increase pension age
Reduce generosity of indexation
Reduce generosity of benefit calculation
Increased private (funded) provision
Pensions Green Paper, December 2002
Why more reforms?
• Under-‘saving’: 3million + 5 or 10 million
What reforms?
• Simpler pensions & tax treatment
• Better information
• More flexible retirement
Not overhaul of ‘voluntarist’ system nor of
incentives currently provided
The UK Pension system, 2003/4
Third tier
(voluntary)
Second tier
(mandatory)
Additional voluntary
contributions
(AVCs)
Approved
occupational
pensions
(DB & DC form)
Other
saving
‘Free-standing’
AVCs
Personal
pensions
(individual)
Stakeholder
pension
Contracted out
First tier
(mandatory)
Basic state
(flat) pension
State 2nd
Pension
(S2P)),
formerly
SERPS
Contracted in
Pension Credit,
formerly MIG
Reforms
• 1981: Price index BSP
• 1988: Personal Pensions
• 2000: SERPs generosity reduced (1986/1990
legislation, both halved SERPs generosity,
reforms to be phased in)
• 2001: Formal introd. of Stakeholder pensions
• 2002: State Second Pension (S2P)
• 2003: Pension Credit
• ?2007? S2P made into flat-rate benefit
• 2010-20: Retirement age for women to 65
What’s the issue?
Policy question
• Are people saving enough?
Academic question
• Are people saving enough?
Conceptual Framework
• Lifecycle model
• Consumption (& saving) depend on:
• total resources; prices (interest rate);
preferences
• Save to facilitate consumption smoothing
• Also smooth through labour supply
The Taxation of Saving
Three points at which savings could be taxed:
• Initial deposits (tax on earnings)
• Returns on investment (tax on interest/ capital
gains)
• Withdrawals (tax on withdrawals)
Regimes
• “Comprehensive income tax”: TTE (or ETT)
• “Comprehensive expend. tax”: EET or TEE
The Taxation of Savings in UK
• Interest bearing accounts: Taxed, Taxed,
Exempt (TTE)
• Private Pensions
• ISAs (TESSAs & PEPS)
(EET(E))
(TEE)
• A tax perk for the rich?
• More help for the poor: a Saving Gateway?
A Saving Gateway?
Matched savings vehicle to lower-income adults
• Correct disincentives from benefit withdrawal
• Correct low savings due to lack of knowledge/
habit
Problems
• Targeting: those who already save
• Targeting: those with good reasons not to save
• Borrow to ‘save’
Reform as a natural experiment
Personal Pensions and Saving
• 1988: New route for opting out of SERPs
• First form of tax relieved retirement saving for
those not covered by occ. Schemes
• Normal Contracted Out Rebates (5.8% of
earnings between UEL & LEL) plus 2% bung
for years before 1993
• Reduced SERPs generosity also announced
Effects of personal pensions
Effects:
• How many savers?
• Characteristics of savers
• How much will people save?
• How much of the saving is new saving?
• Effect on public finances of reform to national
insurance and SERPS
Effects of personal pensions:
OP saving across the income distribution
Occupational pension only
Occupational and personal pension
0.9
0.8
Proportion
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
zero
earnings
poorest 2
3
4
5
6
7
8
9
Earnings decile
Source: Disney, Emmerson and Wakefield (2001) using BHPS data.
richest
Effects of personal pensions:
PP saving across the income distribution
PP: contributing
PP: but not contributing
0.30
Proportion
0.25
0.20
0.15
0.10
0.05
0.00
Zero
earnings
poorest 2
3
4
5
6
7
8
9 richest
Earnings decile
Source: Disney, Emmerson and Wakefield (2001) using BHPS data.
Effects of personal pensions:
Amounts of contributions by source
Figure X. Contributions to personal pensions, 1989–90 to 2002-03.
Employee
DSS
Employer
Employees free standing AVCs
4,000
£, million (2001-2002 prices)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 .01-02 .02-03
Year
Source: Inland Revnue Statistics (various years)
Lessons from Personal Pensions
People will respond to incentives:
• No. of optants under-predicted by fact of 8
(Disney and Whitehouse, 1992)
• Relevance to saving gateway?
Lessons from Personal Pensions
Impact on Household saving rate
• Substitution effect: new vehicle good value (+)
• Offsetting from existing assets
• Wealth effect of COR investment (-)
(occ pen holders and mis-selling)
• 1989-90: £750m of £5.5 billion
• 2001-02: £3 billion of £9 billion (0.3% of GDP)
Lessons from Personal Pensions
Opting out and the public finances
• “One-way bet” and opting out voluntary
implies future SERPs reduction won’t recoup
all of CORs paid.
Case study of PPs gives us economic analysis
of substitution and wealth effects on savings,
and also public finance analysis
Conclusions
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Ageing population, pressure on pensions
UK system: complex and ongoing reforms
Will people have adequate resources?
Reforms as useful case study for analysis
But number of reforms and their interactions
can complicate analysis
• More importantly: difficult for families to plan
their saving (stakeholder, PC, SG, ISA)
• Plea for simplification then stability!