Planning Pensions for the 21 st Century: Meeting the Challenges of an Ageing Society Jane Falkingham ESRC SAGE Research Group London School of Economics Ageing Population – Benefit Or Burden? Edinburgh, Scotland 22nd January 2002

Overview The challenges of an ageing population: demographic, economic & policy legacy The challenges of an ageing population: demographic, economic & policy legacy Pension systems: desirable criteria Pension systems: desirable criteria New Labour’s pension settlement New Labour’s pension settlement Ways forward in the 21 st Century Ways forward in the 21 st Century

The challenges of an ageing population: demographic context Increasing proportion of pensioners in the population Increasing proportion of pensioners in the population % aged over % aged over % % % %

The challenges of an ageing population: demographic context Increasing proportion of pensioners in the population Increasing proportion of pensioners in the population % aged over % aged over % % % % Increasing time spent in retirement Increasing time spent in retirement Female life expectancy at age 60 Female life expectancy at age in Scotland; 22.8 in England 21.3 in Scotland; 22.8 in England

The challenges of an ageing population: demographic context “Old age is the most unexpected of all things to happen to a man” Excerpt from Leon Trotsky’s diary, Mexico Excerpt from Leon Trotsky’s diary, Mexico The normalisation of old age means it is no longer a ‘risk’ to be insured against The normalisation of old age means it is no longer a ‘risk’ to be insured against

Age % Source: Evandrou and Falkingham, Changes in Working Life: Proportion of men in employment by birth cohort

The challenges of an ageing population: economic context 1 in 3 people aged 50 to retirement age are not in employment. 1 in 3 people aged 50 to retirement age are not in employment. The proportion of men aged not in employment has doubled since The proportion of men aged not in employment has doubled since 1979.

The challenges of an ageing population: policy context Changes in the welfare mix

The challenges of an ageing population: policy context Changes in the welfare mix A devalued basic pension A devalued basic pension

The challenges of an ageing population: policy context Changes in the welfare mix A devalued basic pension A devalued basic pension Growth in occupational pensions Growth in occupational pensions

Current membership of occupational pension scheme by sex and socio-economic group (%) Source: General Household Survey 1998 %

The challenges of an ageing population: policy context Changes in the welfare mix A devalued basic pension A devalued basic pension Growth in occupational pensions Growth in occupational pensions Personal pensions Personal pensions Individualisation of risk Individualisation of risk

The challenges of an ageing population: policy context Changes in the welfare mix A devalued basic pension A devalued basic pension Growth in occupational pensions Growth in occupational pensions Personal pensions Personal pensions Partnership in pensions’ state:non-state balance to shift from 60:40 to 40:60 Partnership in pensions’ state:non-state balance to shift from 60:40 to 40:60

Rising Pensioner Incomes: Average gross income, 1979 and 1996/7 Source: Table A1 The Pensioners’ Income series 1999/00 Note: all figures July 1999 prices

Rising Inequality: Median net income of pensioner couples, 1979 and 1996/7 Source: Table A13 The Pensioners’ Income series 1999/00 Note: all figures July 1999 prices

The challenges of an ageing population: pensioner poverty Over a quarter of pensioners have incomes in bottom fifth of the income distribution Over a quarter of pensioners have incomes in bottom fifth of the income distribution 38% of single female pensioners and 81% of married female pensioners have gross incomes of less than £100 per week 38% of single female pensioners and 81% of married female pensioners have gross incomes of less than £100 per week Single female pensioners have the highest risk of experiencing persistent poverty Single female pensioners have the highest risk of experiencing persistent poverty

The challenges of an ageing population More older people, living longer More older people, living longer Shorter working lives Shorter working lives Greater diversity, growing inequality Greater diversity, growing inequality Changing pension mix, increasing individualisation of risk Changing pension mix, increasing individualisation of risk

Pension systems: desirable criteria Adequacy Adequacy Administrative efficiency Administrative efficiency Affordability Affordability Equity Equity Political sustainability Political sustainability Protection of incentives Protection of incentives Transparency Transparency Any reform involves a trade-off between these criteria. Any reform involves a trade-off between these criteria.

New Labour’s pension settlement Pre 1998 First tier state provision Basic State Pension Income Support Second tier compulsory options SERPS Occupational Pensions Personal Pensions Third tier voluntary options AVCs

New Labour’s pension settlement Pre 1998 Post 1998 First tier state provision Basic State Pension Income Support Basic State Pension Minimum Income Guarantee Pension Credit Second tier compulsory options SERPS Occupational Pensions Personal Pensions SERPS State Second Pension Occupational Pensions Stakeholder Pensions Personal pensions Third tier voluntary options AVCsAVCs

New Labour’s pension settlement: delivering adequate incomes?

Today’s Pensioners Focus on Minimum Income Guarantee Focus on Minimum Income Guarantee Extension of means-testing Extension of means-testing

New Labour’s pension settlement: delivering adequate incomes? Today’s Pensioners Focus on Minimum Income Guarantee Focus on Minimum Income Guarantee Extension of means-testing Extension of means-testing Problems of take-up Problems of take-up

New Labour’s pension settlement: delivering adequate incomes? Today’s Pensioners Focus on Minimum Income Guarantee Focus on Minimum Income Guarantee Extension of means-testing Extension of means-testing Problems of take-up Problems of take-up Problems of incentives to save Problems of incentives to save

New Labour’s pension settlement: delivering adequate incomes? Today’s Pensioners Focus on Minimum Income Guarantee Focus on Minimum Income Guarantee Extension of means-testing Extension of means-testing Problems of take-up Problems of take-up Problems of incentives to save Problems of incentives to save Pension Credit Pension Credit Another layer of complexity Another layer of complexity

New Labour’s pension settlement: delivering adequate incomes? Tomorrow’s Pensioners State Second Pension State Second Pension

New Labour’s pension settlement: delivering adequate incomes? Tomorrow’s Pensioners State Second Pension State Second Pension Target group < £10,000 per annum Target group < £10,000 per annum

New Labour’s pension settlement: delivering adequate incomes? Tomorrow’s Pensioners State Second Pension State Second Pension Target group < £10,000 per annum Target group < £10,000 per annum ? Adequacy In 2050, BP+ S2P > MIG by £1 ? Adequacy In 2050, BP+ S2P > MIG by £1

New Labour’s pension settlement: delivering adequate incomes? Tomorrow’s Pensioners State Second Pension State Second Pension Target group < £10,000 per annum Target group < £10,000 per annum ? Adequacy In 2050, BP+ S2P > MIG by £1 ? Adequacy In 2050, BP+ S2P > MIG by £1 ? Incentives & means-testing ? Incentives & means-testing

New Labour’s pension settlement: delivering adequate incomes? Tomorrow’s Pensioners State Second Pension State Second Pension Target group < £10,000 per annum Target group < £10,000 per annum ? Adequacy In 2050, BP+ S2P > MIG by £1 ? Adequacy In 2050, BP+ S2P > MIG by £1 ? Incentives & means-testing ? Incentives & means-testing ? Equity ? Equity

New Labour’s pension settlement: delivering for the next generation? ? Transparency ? Transparency

New Labour’s pension settlement: delivering for the next generation? ? Transparency ? Transparency ? Political sustainability of: ? Political sustainability of: a system of separate and incoherent elements a system of separate and incoherent elements a system targeted on the lifetime poor a system targeted on the lifetime poor a system designed without due regard to the future a system designed without due regard to the future

Ways forward in the 21 st Century Pensions policy is the oil tanker of social policy Pensions policy is the oil tanker of social policy Need a system to deliver for both today’s pensioners and tomorrow’s Need a system to deliver for both today’s pensioners and tomorrow’s Go ‘back to basics’ Go ‘back to basics’ Think the unthinkable Think the unthinkable