Fiscal effects of reforming the UK state pension system

Abstract

The fiscal and distributive impacts of three reforms to the social security pensionsystem in the UK are evaluated. All three reforms are designed to increase theretirement age by changing the incentive structure underlying the pension system. Thefirst increases the state pension age by three years. The second introduces an actuarialadjustment to retirement both before and after age sixty five allowing deferral to age70. The final reform adapts the second reform to include a cap and a floor so as tomirror more closely the existing state pension scheme in the UK. Using a transitionmodel of retirement, the simulations show that increasing the state pension age leadsto a lower level of expenditure on the state pension, which is only partially offsetthrough increased state spending on both means-tested income support and disabilitybenefit (invalidity benefit). Employee national insurance receipts are also directlyincreased through the increase in the state pension age. The increase in retirementages would also lead to an increase in government revenues arising from increasedincome tax and employee and employer national insurance contributions. As a resultthere would be lower levels of government borrowing (or larger governmentsurpluses) than under the base system. The fiscal and distributive impacts of three reforms to the social security pensionsystem in the UK are evaluated. All three reforms are designed to increase theretirement age by changing the incentive structure underlying the pension system. Thefirst increases the state pension age by three years. The second introduces an actuarialadjustment to retirement both before and after age sixty five allowing deferral to age70. The final reform adapts the second reform to include a cap and a floor so as tomirror more closely the existing state pension scheme in the UK. Using a transitionmodel of retirement, the simulations show that increasing the state pension age leadsto a lower level of expenditure on the state pension, which is only partially offsetthrough increased state spending on both means-tested income support and disabilitybenefit (invalidity benefit). Employee national insurance receipts are also directlyincreased through the increase in the state pension age. The increase in retirementages would also lead to an increase in government revenues arising from increasedincome tax and employee and employer national insurance contributions. As a resultthere would be lower levels of government borrowing (or larger governmentsurpluses) than under the base system.