Save now or retire later is the choice for tomorrow's pensioners
Unless today's middle earners either save more or retire later they face the prospect of a poorer old age. Incentives to save more, however, may be reduced by government policies aimed at greater means-testing of state-financed support for pensioners.
These are among the findings of a new analysis of pensions and pensions policy to be presented at an Economic and Social Research Council seminar today. Leading economists from the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (IFS) will present the latest empirical evidence and microeconomic thinking on the key questions policymakers must address if they are to design a fair and efficient pension system.
Professor Richard Blundell, Director of the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS argues: "In designing a fair and efficient pension system policymakers need to have three important questions in mind. First, is the financial support offered to pensioners by the state in retirement sustainable in terms of the burden it places on the working population? Second, are the mechanisms by which the private financial sector helps people save for retirement sustainable in their apportionment of risk between employers and employees? Third, is the way in which the state and private systems interact sustainable in the sense that the combination promises people a reasonable degree of financial security without creating unduly powerful disincentives for them to work and save?"
"The answers to these questions," Professor Blundell continues, "depend on a multitude of complex factors, ranging from demography to investment returns, and from labour market opportunities to financial literacy. None is easy to resolve, but empirical microeconomic analysis can help shed light on all of them."
Some of the key findings presented at the seminar include:
- Despite an ageing population and a decline in the number of working age people relative to the number of pensioners, the costs of the current UK state pension system are not expected to require increases in taxation. At first glance, the UK appears to be relatively fortunate compared to other countries as official projections suggest that the cost of the state pension system will remain broadly stable as a share of national income. But the picture may not be quite as benign as this suggests. The UK system appears as sustainable as it does because it will become increasingly less generous and increasingly reliant on means-testing. If people respond by reducing private savings, this could push a greater burden onto the state.
- With regard the relative role of employees and employers in making private pension provision, the move from final salary defined benefit (DB) to defined contribution (DC) schemes will shift investment and longevity risks increasingly onto individuals. This does not appear a short-term phenomenon that will be reversed by better stock market performance. The shift is likely to focus growing attention on the workings of the annuities market, as well as affecting incentives to retire at different ages.
- The changes in the generosity and targeting of the state pension system, combined with the changing nature of private pension provision, will affect people's savings and retirement decision in different ways at different points in the income distribution. The choices available to the poorest are limited in any event and may not be altered in any significant way. The richest will be affected by the changes in private provision, but they are more likely to be financially literate and if even if they do not adjust their behaviour accordingly it is unlikely that they will fall back on to the state. The most important group are those people who are, or expect to be, on low to middle incomes – who are at the interface of the state and private systems.
They will face clear incentives to work longer and retire later, but it is less clear whether in aggregate the system will encourage them to save more. If they do not, then the burden may be thrown back on the state.
The researchers also suggest that government should exercise caution in extrapolating future savings or retirement behaviour from the behaviour of those currently approaching retirement age. "It is unwise to draw too many lessons from the outcomes of today's retirees to government policy changes regarding pensions," argues Professor Blundell. "The generosity of the pensions system and the favourable trends in productivity growth and asset markets seen over the last twenty years might mean that the economic pressures enjoyed by today's 'golden generation' have not been extreme enough to offer an accurate guide on how future generations will cope," he concludes.
Source: Eurekalert & othersLast reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
Published on PsychCentral.com. All rights reserved.